Monday, February 16, 2015
Rush out of JGBs starting?
Over the last month JGB rates and prices have been on the move:
In the last month the yield on 10 year bonds has doubled from 0.22% to 0.44%. This means half the interest earned over the next 10 years just covers the drop in bond price over the last month.
The 5 year has gone from 0% to 0.13%. This means that all the interest earned over the next 5 years just equals the drop in bond price over the last month. Whatever the yield is next month for 5 years will still just equal the drop since January. Risk reward balance is not good and does not improve even as yields go up.
The Bank of Japan is buying bonds really fast. If the yield is going up and bond prices are going down then the selling must be even stronger.
I am expecting a panic out of JGBs and wonder if it is starting. I am interested to see the next 10 day report on Bank of Japan assets. The last two 10 day periods they increased base money by 3% and 0.6%. Those are not annual rates. That 3% in increase in 10 days looks crazy, and it is. Will also be interesting to keep watching the JGB yields.
With them printing so fast, who would want to hold JGBs at what are still crazy low rates? But if everyone is getting out of JGBs, then they will have to print faster. These two things can result in a death spiral. Really seems like it is not a good time to be holding either JGBs or Yen.