Authored by Kevin Muir via The Macro Tourist blog,
Given the reporting regarding the recent action in the Japanese government bond market, you would think that another late 1970s style bond bear market had descended upon Japan.
“Biggest plunge since Lehman…”
“The 1% Threat in Japan That Has Global Bond Markets On Edge…”
“BOJ Policy Change Speculation Roils Markets”
The breathless commentary about the large standard deviation move in JGB futures has reached a feverish pitch. The highlighting of the massive Z-score move that has resulted from the Bank of Japan expanding the range of their 10-year JGB yield peg is filling my inbox.
But let’s step back and think about this logically.
If you peg an asset or a rate, then by definition, it will be less volatile. Since the BOJ has pegged the 10-year JGB yield for the past couple of years, any change from that level will cause an abnormally large move in terms of recent volatility. Therefore all these comments about how this is the largest move in years are useless. Of course the Z-score move is through the roof. No shit Sherlock. It’s like reporting on the Z-score for the price of a sofa. It’s stable, stable, stable, stable, then boom - the store marks it down 25% in a Labour Day sale. Holy smokes -the largest Z-score move since Lehman! The world is coming to an end, better stock up on canned food and ammo.
JGBs have long stopped being a real market, so don’t apply traditional market metrics to it.
Now on to my next pet peeve. Given the commentary, you would think there is a real crisis occurring in the JGB market.
There have been tons of charts like the following that show the “JGB Crash”:
Sure looks scary. That’s quite the collapse.
But is it really?
It’s all a problem with scale.
Don’t forget that the JGB market has been extraordinarily stable since the BOJ peg.
Let’s back up and look at the JGB 10-year yield chart over a longer time period:
I don’t know about you, but I am having a difficult time finding this “crisis” on the chart.
And the whole idea about this JGB sell-off being anything more than a blip is laughable when you look at the JGB futures chart with the carry incorporated into the continuous chart:
I can already hear the pushback to my argument. This is just the start. The warning shot across the bow. It’s not just the effect on the JGB market, but Japanese investors have caused sell-offs in other sovereign bond markets.
Sure, that could be. I have no doubt that this move caused some ripples in global bonds.
Yet let’s not kid of ourselves. To call this recent JGB move a big-deal is insulting to true market dislocations. Lord help us if this is what now counts as a crisis.
http://www.zerohedge.com/news/2018-08-02/one-trader-scoffs-isnt-even-close-real-jgb-crisis
Realist - Everybody in America is soft, and hates conflict. The cure for this, both in politics and social life, is the same -- hardihood. Give them raw truth.
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