So the other day, in “‘A Reversal Could Be Very Painful’: JGB Average Volume Hits All-Time Low,” we suggested that one explanation for why yields didn’t react to the BoJ cutting purchases of 5-to-10 year JGBs by JPY30 billion to JPY440 billion last week, has to do with the fact that the market simply doesn’t function properly anymore thanks to the size of Kuroda’s footprint.
Well, overnight, the BoJ cut purchases again. This time to JPY410 billion:
BOJ CUTS 5-10 YR JGB BUYS TO 410B YEN; 440B YEN IN LAST OP.
— Heisenberg Report (@heisenbergrpt) August 25, 2017
And as you can see, nobody cared or else nobody is home or else the supply-demand picture has become so distorted by the BoJ’s presence in the market that nothing can stop yields from grinding inexorably lower:
This has become so circular that it eludes attempts to lampoon it. So the idea was to cap 10Y yields at 0.10% but in doing so, they’ve engineered an acute shortage, which of course presses yields lower, and now they’re taking the “opportunity” to scale back purchases ostensibly to give them room to buy more if yields eventually rise.
“The reduction was prompted by shrinking supply of available debt, which is helping cap any increase in yields and making it easier for BOJ to plan for further cuts,” Souichi Takeyama, a rates strategist at SMBC Nikko Securities in Tokyo said Friday.
“The continued decline in JGB yields even as the Bank of Japan cut 10-year bond purchases today, raises the chance of a further reduction at its regular operations next week,” Akio Kato, general manager of trading at Mitsubishi UFJ Kokusai Asset Management Co. in Tokyo noted, adding that “the impact from the scarcity of available bonds due to BOJ’s aggressive bond buying scheme is becoming increasingly evident, leading to insensitivity of yields.”
Right, but again: what the fuck is the point of this? Here’s more from Kato:
The continued rally in the bond market even after BOJ reduced its purchases will enhance the central bank’s ability to further scale back its buying until markets reverse and slump, pushing yields higher.
So they wanted to cap yields and now they want to put a floor under yields so that they can start capping yields again later.
Now I guess, on an (extremely) charitable interpretation, you could say this is evidence of “policy sustainability.”
But a less charitable interpretation would be to call it “insanity.”
Finally, note that this sets up a decidedly absurd scenario where they are going to have to explain missing their target of buying around 80 trillion yen annually by asserting that by missing that target, they are actually ensuring that they will be able to hit the target later, because by missing it now, they’re engineering a selloff which they can then buy.
Let that sink in for a sec.
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Let’s see, we need to miss now so later when we have to miss we will do it so we see where we are, to be able to know where we are, and then we can make it right for……………me ………….everyone. Makes sense to me, you bet.