Japan’s Bond Market is About to Break

The crazy people at the BOJ are intent on buying over $100 billion worth of their bonds, per month, and their yield curve has inverted because of it.

“We hold a lot, and we’re not selling,” said Yoshiyuki Suzuki, the head of fixed income in Tokyo at Fukoku Mutual Life Insurance, which has $59 billion in assets. “We can get interest income. If we sell, there are no good alternatives.”

Demand for their longer duration, 30 and 40 year, bonds have been met with woeful demand of the record breaking varietal. Moreover, the BOJ now represent more than a third of the entire JGB market, a number that will increase as their QE continues.

Demand for JGBs has increased so much since the start of negative-rate policy that it’s flipped the market for repurchase agreements on its head: Dealers who in normal circumstances would pay to borrow overnight cash in the repo market — offering debt as surety of repayment — are instead willing to pay to get access to the collateral.

In summary:

“How can the BOJ head for the exit?” Dan Fuss, vice chairman of Loomis Sayles & Co., said at an event in Tokyo last week. “If they open the exit door, there’s a fire on the other side.”

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