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.


  1. From Feb 10 to Feb 20 the Bank of Japan increased the money supply by 1.1%.

  2. Is the 1.1% measured against the Japan version of M1, M2, or some other comparison?

    I have argued that new money should be compared to money issued in the past. In my view, that amount is the total of past government debt and the total of bank sourced debt.

    If we measured the increase of Japan money supply against my base, I think the percent increase would be smaller.

    1. It is the base money supply. It is money the central bank has made. Most people don't count government debt as part of the money supply. If you do that you are correct that the percentage would be smaller. If you do that everywhere Japan would still have a very high percentage compared to other places though. They are making money fast compared to what anyone else has ever been able to do without high inflation. Really.

    2. Because Japan has such a huge debt it is possible there is someone who would be ahead of them if you do money printing relative to total debt, but I can't think of who that would be.

  3. Debt is a measure of how much money has been issued to economic players.

    Where the money-behind-the-debt came from is a second issue. The money may be recycled money such as measured by M1 or M2. This will always be a smaller number than the amount of money actually issued.

    Obviously, there is not enough money in existence to pay all of the debt at one time.

    1. If Ford sells a bond it is not really making money. If you even count government debt as money then you make it look like printing money and buying government bonds does not matter when clearly it does. A key feature of nearly every hyperinflation.

    2. Ford bonds can go bankrupt just like General Motors bonds. So I agree that you are not making money with new corporation bonds.

      Government borrowing is different. Bank borrowing is different. Both create new money that is available to bond holders and deposit holders.

      Government has two sources from which it can borrow: the private economy and government itself. Borrowing from the private economy recycles money while borrowing from itself (often a central bank) is naked money creation.

      When hyperinflation occurs, do you know if government equates issuing money with increased debt?

      In the United States, right now, I think all government deficit spending is matched with new debt. The U.S. central bank also issues money in exchange for Mortgage Backed Securities, but I think there is no matching government debt in this transaction.

  4. Hi Vincent. Check it out:

  5. ok- now, What the man on the street REALLY wants to know.......

    How will hyperinflation effect MY immediate circumstances?
    Will my property taxes go to 1 trillion a year?
    Will my wage increase to 100,000k a day to keep up with expenses?
    Will I be glad that I bought that car,house, pre hyperinflation prices because now I can pay them off with inflated wages etc......
    or will the bankers get that deal but we get our debt inflated as well?
    This is what we really want/need to know. I want to know if I should buy that property now instead of having money in the bank or if the taxes will be untenable and it will be taken anyway........thank you in advance for adressing the real questions the man on the street has.

    1. People tend to become poor during hyperinflation because their wages do not keep up with inflation. You should not expect wages to keep up in a future hyperinflation.

      Most of the time savings and debt ends up becoming worthless so you are much better off owing people money than having people (or banks) owe you money. Once in awhile laws have been passed to try to index the debt to some sort of inflation index, so there is some danger, but I think even then it is sort of trying to close a barn door after the horses are out.

      As things go South there are often troubles at the banks where banks have to limit the amount of money you can take out. So if you are planning to make a move after the inflation gets serious, it might then be too late.

      Typically people are not in a position to pay more taxes and that is part of why the government is printing money. If most of the other people near you can not pay higher property taxes, it will not really do the government any good to raise the rates. So I would not expect property taxes to keep up with inflation but they could still be more painful since your wages don't keep up with inflation.

      If you can get a long term loan (like 20+ years) at a low fixed interest rate and buy something real, like property, hyperinflation would probably make that seem like a great move.

      People talk about hyperinflation as a huge wealth transfer from savers to debtors. There is much truth to this.

  6. eToro is the most recommended forex broker for newbie and full-time traders.


Looking for polite debate on ideas. Never attack a person. Be nice.