Japanese Government Bond Futures Are Flash-Crashing (Again)

Remember that once-in-a-lifetime, “don’t worry there’s plenty of liquidity” flash-crash in japanese Government Bond futures on Tuesday night (Wednesday morning Japan time)… well it happened again…

JGB Futures to be halted any minute…

And so the market chaos even among the “safest” of securities, the result of central bank intervention, continues. Bloomberg’s Richard Breslow summarized it best:

Even with QEs creating what look an awful lot like bubbles, it’s been fair to say, those distortions reflected the reaction function of how central bankers interpreted the state of play. Yield levels, let alone negative rates, and volatility are making these guideposts increasingly questionable.

If you look at the yield curves of much of the world, you’d be hard pressed not to conclude we are very much still experiencing a severe global recession. Central bankers may strongly disagree, yet Japanese 10-year JGBs haven’t seen 2% this century. German bunds have backed up to 21bps. Both are likely to increase QE. The U.S. is tightening (?) and 10- year yields are still down 42bps on the year

The Fed wants to raise rates but insists on re-investing the take on its massive portfolio. They act like fund managers protecting their AUM.

The Osaka Stock Exchange had to invoke circuit breakers today on the March JGB future for excessive volatility. Buying panic yesterday to front-run today’s QE buying led to panic selling today into BOJ bids 22 bps through Monday’s close. Oh, and did I mention, ahead of an auction tomorrow. The take-away is mayhem, not analysis.

And now we look forward to an even greater surge in volatility first ahead of the Fed and BOJ next week, who – just like everyone else – have no idea what is going on any more.

Tonight’s debate comes just five days ahead of the next week’s “Super Tuesday 3,” when there are more than 350 delegates up for grabs, including in winner-take-all contests in Florida and Ohio.

Some wonder just who it is that is selling JGBs so aggressively and in such entirely economically irrational a manner? Well we got hints who has been dumping Bunds from Goldman recently, which makes us think, as MNI ‘hints’ at, if The BoJ is not trying to “Goldilocks it”…

BOJ officials recognize that any upward pressure on JGB yields stemming from a brighter view on economic growth and inflation would be impeded by the BOJ’s massive purchases of JGBs, which also have been restricting risk premiums.

But some of them worry that the drop in the 10-year yield into negative territory may reflect undue pessimism by market players.

Just how much the negative yields are influenced by that pessimism and how much by the BOJ bond buying can’t be determined.

At this point it is also unclear how a gradual return to a steeper yield curve will happen, although BOJ officials must assume it will. It may be that changing sentiment in the market will be enough to overpower the other factors and begin to push up yields.

If it isn’t, things may become much more complicated, since it would then take some move toward an unwinding of the BOJ’s bond-buying policy to shift yields, and that would bring officials uncomfortably close to a knife edge of trying to edge up yields without making them spike.

In other words – rates not too low (or signals pessimism for growth) and not too high (because the entire fiscal balance will implode) – good luck centrally planning that.