JGB Yields Nearing Record Lows
Not that anyone cares much in today’s QE infested world, but Japan’s economy continues to “temporarily†disappoint, in spite of his Arrowship’s efforts. Apparently the real economy is being subjected to a rather stubborn soft patch, and there is at least one market that seems to believe it is going to continue. Unfortunately said market is the JGB market, which isn’t exactly free of manipulation these days, so that the signals it is sending are not truly reliable. In fact, it continues to be one of the strangest major asset markets in the world – and it is only a touch away from hitting new all time highs (new all time lows in yields). In fact, on a weekly closing basis the 10-year JGB futures contract ended last week at a new all time high.
Trading volume has collapsed due to the BoJ entering the market as a massive buyer, and prices continue to drift higher. The real return of the 10 year JGB at the current official inflation rate is a deeply negative minus 3.16% per year – in other words, this market sports a completely unwarranted negative price premium, and obviously no risk premium whatsoever. This simply makes no sense.
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10 year JGB (continuous contract) – ending last week at a new all time closing high – click to enlarge.
While the 10 year JGB yields just a little over 50 basis points, the annualized rate of change of Japan’s CPI has accelerated further from 3.4% in April to 3.7% in March – click to enlarge.
At the very least it can be stated that the BoJ has managed to completely falsify interest rate signals across the yield curve, and is thereby obviously vitiating economic calculation in Japan.
Economic Data Continue to Slump
Below is a look at the most recent disappointing data release. It has been hoped that there would be an investment renaissance in Japan on the back of rising prices and falling real incomes (yes, it makes no sense, but that is the theory of modern central banking in action). These hopes seem increasingly misplaced, although economists only want to completely abandon them once the data for June come in:
