It's underway. A sea change you don't want to get caught snoozing through.
Once upon a time there was a longtime county treasurer in California that made a lot of money for the county by borrowing short and investing long until one day a sea change in the interest rate market occurred. The county went bankrupt and he took his rightful place in the hall of investing infamy.
It's no secret that Japan's target inflation rate is a no show and the yen has appreciated nearly 18% so far this year, hurting exports and economic recovery in general. It's also an open secret not just the Bank of Japan but other central banks are running out of rabbits to extricate from their monetary policy top hats.
According to reports, the Japanese government holds about one third of outstanding government bonds, and like a rain and wind swept, swollen river a figure that is rising steadily. Enter BOJ Governor Haruhiko Kuroda who Monday stepped to the mike and criticized the negative interest rate program because of the tension it was placing on banks. To make money banks need a steeper yield curve. As noted below the spread between two-year and 30-year debt is now only 30 basis points. That's one big Ouch! for banks, pension funds, retirees and the like.
One way to get a steeper yield curve is to remove the underlying safety net, the BOJ put option. In short, drying up the official demand, not a healthy scene for long term bond prices that many feel are already at bubble proportions. Should Japan venture down that road what will be the global effect on other sovereign bond markets? It's pretty difficult to toss a pebble in pond without causing a few ripples.
Once upon a time there was a longtime county treasurer in California that made a lot of money for the county by borrowing short and investing long until one day a sea change in the interest rate market occurred. The county went bankrupt and he took his rightful place in the hall of investing infamy.
It's no secret that Japan's target inflation rate is a no show and the yen has appreciated nearly 18% so far this year, hurting exports and economic recovery in general. It's also an open secret not just the Bank of Japan but other central banks are running out of rabbits to extricate from their monetary policy top hats.
According to reports, the Japanese government holds about one third of outstanding government bonds, and like a rain and wind swept, swollen river a figure that is rising steadily. Enter BOJ Governor Haruhiko Kuroda who Monday stepped to the mike and criticized the negative interest rate program because of the tension it was placing on banks. To make money banks need a steeper yield curve. As noted below the spread between two-year and 30-year debt is now only 30 basis points. That's one big Ouch! for banks, pension funds, retirees and the like.
One way to get a steeper yield curve is to remove the underlying safety net, the BOJ put option. In short, drying up the official demand, not a healthy scene for long term bond prices that many feel are already at bubble proportions. Should Japan venture down that road what will be the global effect on other sovereign bond markets? It's pretty difficult to toss a pebble in pond without causing a few ripples.
Kuroda on Monday also pointedly flagged concerns about negative potential effects from the slide in long-maturity bond yields. Earlier this year, rates as long as 20 years touched zero percent. The BOJ chief noted that the drop hurt returns on pension programs, and could affect confidence levels and the economy more broadly.
As Kuroda said, clearly highlighting the dangers of a flatter yield curve, "some business firms have revised down their profit forecasts due in part to the increase in the net present value of retirement benefit obligations. We should take account of the possibility that such developments can affect people’s confidence by causing concerns over the sustainability of the financial function in a broad sense, thereby negatively affecting economic activity.”
It then resumed in late August, after central bankers made another coordinated push for fiscal stimulus at Jackson Hole, which would mean more sovereign debt supply, and thus lower prices, all else equal. Then earlier this week, Kuroda said that a review of the current stimulus efforts due by the Sept. 20-21 policy meeting in which some analysts and investors read between the lines that the BOJ may be seeking to force a shift toward a steeper yield curve after the gap between two- and 30-year securities compressed to a record 30 basis points.
zerohedge.com/news/2016-09-08/brace-var-shock-bank-japan-may-be-about-unleash-global-selloff
For what's it's worth we think it will begin before it's announced. Central bankers always favor bankers over the public.
It then resumed in late August, after central bankers made another coordinated push for fiscal stimulus at Jackson Hole, which would mean more sovereign debt supply, and thus lower prices, all else equal. Then earlier this week, Kuroda said that a review of the current stimulus efforts due by the Sept. 20-21 policy meeting in which some analysts and investors read between the lines that the BOJ may be seeking to force a shift toward a steeper yield curve after the gap between two- and 30-year securities compressed to a record 30 basis points.
zerohedge.com/news/2016-09-08/brace-var-shock-bank-japan-may-be-about-unleash-global-selloff
For what's it's worth we think it will begin before it's announced. Central bankers always favor bankers over the public.
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