Something strange is happening with Japan’s bond market: Hardly anyone is trading it

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Something strange is happening with Japan’s bond market: Hardly anyone is trading it‘CNBC

Something strange is happening with Japan’s bond market: Hardly anyone is trading it

In Japan, the central bank’s efforts to boost the economy through extraordinary monetary stimulus are having an unintended consequence: Few want to trade the government’s bonds.

The 10-year Japanese government bond didn’t even trade on March 13, according to broker-dealer Japan Bond Trading. Other government bonds also showed no trading activity on specific days last month, and the 2-year bond did not trade on Tuesday and Wednesday, the data showed.

Like many major central banks, the Bank of Japan has been buying the country’s bonds in order to stimulate the economy. But the bank has taken more extreme measures, such as ramping up purchases to more than 40 percent of the market overall and saying it would control the yield curve by keeping the 10-year government bond yield around 0 percent.

As a result, traders are turning to bond futures, where having more buyers and sellers makes entering and exiting positions easier. The futures market is often used for trading in oil, gold and agriculture products. Using the derivative products allows traders to bet on where prices will go without the hassle of having to buy an item itself.

Open interest, a measure of trading volume in futures, for 10-year Japanese government bond futures rose 46 percent in March from a year ago, according to data released last week by the Japan Exchange Group. Year-over-year open interest in February and January also rose, by nearly 23 percent and 19 percent, respectively.

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Weekly Commentary: Market Realities

Markets have grown well-versed at disregarding structural issues. I’m still amazed at what the marketplace was willing to ignore throughout the mortgage finance bubble period: A doubling of mortgage credit in just about six years; California’s housing market out of control by 2005; $1.0 trillion of subprime CDS in 2006; the unprecedented growth in leveraged securities holdings and so on. Unrelenting trade and current account deficits. Didn’t the excesses of the cycle ensure a crash?

For those of us who have studied financial history, 2002-2008 financial follies pale in comparison to “Roaring Twenties” excess that unfolded without ramifications in the eyes of the securities markets – well, that is, until the Great Crash. What today’s markets have chosen to overlook – and what people have come to believe – are even more astounding.

Excesses over the past (almost) decade have been in the “Roaring Twenties” caliber: Prolonged, deeply structural and accompanied by epic misperceptions. And there’s no mystery why markets regress into a dysfunctional mechanism that hears no evil, sees no evil and speaks no evil. Given time (and ample “money” and credit), asset inflation trumps worry; greed conquers fear.

Prolonged bubble dynamics ensure everyone eventually gets aboard the great bull market. Once on the ride, a myopic optimistic view takes on a life of its own, crushing dissent in the process. And the deeper the structural deficiencies – the more resolute central bankers will be with ongoing accommodation. Especially during periods of central bank activism (the current cycle and the “Roaring Twenties” topping the list), structural deficiencies over time turn bullish for asset prices and financial speculation.

Structural U.S. trade and current account deficits are a root cause of much that afflicts the world economy these days. At $57.6 billion, February’s U.S. trade deficit was the largest since 2008. At $154 billion, Q4 ’17’s current account deficit was the biggest going back to Q3 2008. Even in the depth of economic recession, the U.S. in 2009 ran a current account deficit of $384 billion. Indicative of historic structural maladjustment, the U.S. has not posted a quarterly current account surplus since 1991. This was only possible because of Federal Reserve activism.

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Something strange is happening with Japan’s bond market: Hardly anyone is trading it
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