Several days ago, around the time of Friday’s historic, largest-ever BOJ intervention in the FX market, we pointed out something which almost nobody had noticed: the BOJ’s Yield Curve Control had already failed on several occasions, with 10Y yields crossing well above the 0.25% Yield-Curve Controlled barrier…
Everyone was so focused on lettuce and the Fed blowing up the US economy, nobody noticed that YCC has now failed and the grand MMT experiment is hanging by a thread. pic.twitter.com/6MJglr248f
— zerohedge (@zerohedge) October 21, 2022
… and that Kuroda was valiantly injecting trillions of yen in the financial system to defend a barn door that has already been blown open.
But one person did notice what was quietly going on below the unmoving surface of the JGB market, where the BOJ now owns more than half of the entire Japanese bond market and where days can pass without a single trade crossing: that person is DB’s FX strategist George Saravelos and in his Monday FX blog titled “Broken”, writes that “the below chart shows something striking: the Bank of Japan’s yield curve control policy is, for all intents and purposes, already broken. Only the three 10-year government bond yields that are now eligible for the BoJ’s fixed rate buying operations trade at or below the 25 basis point yield cap. Bonds maturing on either side of the targeted maturity now trade with yields materially higher than the cap.”
Of course, just because YCC is broken doesn’t mean it couldn’t be far worse. Or rather, far, far, far, worse.
As Saravelos explains “if it wasn’t for the Bank of Japan’s unlimited fixed rate tenders and broader QE, the entire Japanese yield curve would likely be significantly higher.” But the “broken” curve not only demonstrates the scale of policy distortion but its likely limits too: according to the FX strategist, with the Bank of Japan reaching near-full ownership of those three specific bonds, the time is soon approaching where these bonds will stop trading in their entirety and the market will simply cease to exist.
Yes, with the BOJ owning all of the fulcrum securities of the JGB bond market, that will be game over for the world’s foremost MMT experiment. At that moment of singularity, there will be no willing seller of ten-year bonds at the Bank of Japan’s designated purchase “price”.
As for the idiocy that is the BOJ’s continued intervention in the FX market, here Saravelos agrees 100% with us when he says that FX intervention from the Japanese authorities will not work when the move higher in USDJPY is driven by Bank of Japan policy itself!
Indeed, it is either the BoJ or the broad USD anti-risk parity dynamics that need to shift to change USD/JPY direction. So long as neither is materializing, FX intervention looks completely futile – especially if it ultimately leads to foreign exchange reserve sales which ultimately push global yields even higher.
The question then becomes: since the JGB market is effectively dead, does it not make sense for the BOJ to formally and fully nationalize the bond market, and to at least allow the yen to trade (somewhat) freely? Of course, with the entire Japanese financial experiment now counting down to extinction, at best Tokyo will buy itself a few months time, but as any terminal cancer patient will attest, those few last months are more valuable than anything.
While such a revolutionary reassessment may eventually happen, it won’t be tonight because one day after the BOJ unleashed its biggest – and most futile – FX market intervention in history, selling some $50 billion in US reserve to buy worthless funny-money, it also offered to buy more bonds than planned at its regular market operation on Wednesday to continue the Kabuki theater that its YCC is still functioning.
- BOJ will buy 575b yen of 3-to-5 year notes, vs 475b yen planned
- BOJ will buy 650b yen of 5-to-10 year debt, vs 550b yen planned
- BOJ will buy 350b yen of 10-to-25 year bonds, vs 250b yen planned
- BOJ will buy 150b yen of debt due in 25 years, vs 100b yen planned
Translation: one day the BOJ does everything in its power to prevent the yen from imploding, the very next day it does, well, precisely the opposite as it unleashes the yen firehose assuring new record lows for the doomed currency.
Idiocy? Yes. But once you are in the endgame of MMT and helicopter money, that’s all you have left.
The full DB note is available to pro subs in the usual place.
Tyler Durden
Tue, 10/25/2022 – 22:47
