By Kevin Muir
Given the reporting regarding the recent action in the Japanese government bond market, you would think that another late 1970s style bond bear market had descended upon Japan.
“Biggest plunge since Lehman…”
“The 1% Threat in Japan That Has Global Bond Markets On Edge…”
“BOJ Policy Change Speculation Roils Markets”
The breathless commentary about the large standard deviation move in JGB futures has reached a feverish pitch. The highlighting of the massive Z-score move that has resulted from the Bank of Japan expanding the range of their 10-year JGB yield peg is filling my inbox.
But let’s step back and think about this logically.
If you peg an asset or a rate, then by definition, it will be less volatile. Since the BOJ has pegged the 10-year JGB yield for the past couple of years, any change from that level will cause an abnormally large move in terms of recent volatility. Therefore all these comments about how this is the largest move in years are useless. Of course the Z-score move is through the roof. No shit Sherlock. It’s like reporting on the Z-score for the price of a sofa. It’s stable, stable, stable, stable, then boom – the store marks it down 25% in a Labour Day sale. Holy smokes -the largest Z-score move since Lehman! The world is coming to an end, better stock up on canned food and ammo.
JGBs have long stopped being a real market, so don’t apply traditional market metrics to it.
Now on to my next pet peeve. Given the commentary, you would think there is a real crisis occurring in the JGB market.
There have been tons of charts like the following that show the “JGB Crash”:
Sure looks scary. That’s quite the collapse.
But is it really?
It’s all a problem with scale. Don’t forget that the JGB market has been extraordinarily stable since the BOJ peg.
Let’s back up and look at the JGB 10-year yield chart over a longer time period:
I don’t know about you, but I am having a difficult time finding this “crisis” on the chart.
And the whole idea about this JGB sell-off being anything more than a blip is laughable when you look at the JGB futures chart with the carry incorporated into the continuous chart:
I can already hear the pushback to my argument. This is just the start. The warning shot across the bow. It’s not just the effect on the JGB market, but Japanese investors have caused sell-offs in other sovereign bond markets.
Sure, that could be. I have no doubt that this move caused some ripples in global bonds.
Yet let’s not kid of ourselves. To call this recent JGB move a big-deal is insulting to true market dislocations. Lord help us if this is what now counts as a crisis.
I am not some sort of Pollyanna who thinks all is rosy in the world and you shouldn’t be worried about the massive distortions caused by central banks. But to think this anything more than a minor tweak to a truly nut-bar policy is naive. Kuroda will settle the JGB market down and within a week the world will have forgotten about this JGB bond crisis. At that point, there will be some new topic with an equally dire headline that get pundits hyperventilating which takes over the front page of the financial news media.
Don’t mistake my comments as a belief you should buy bonds. I wouldn’t touch long-dated sovereigns of any stripe. This global bond bubble will end badly. But let’s not pretend that this recent move resembles anything more than a tiny hiccup.
I personally can’t wait until central banks truly lose control of the bond market. At that point 4 bps JGB moves will look like child’s play.
Thanks for reading,
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