It was just last week when we observed and reported a highly amusing example of what excessive central bank meddling hath wrought in DM government bond markets.
Last Tuesday, yields on JGB 10s hit an all-time low of negative 10bps and yields on the 30Y plunged 21bps (the biggest percentage drop ever), as the post-NIRP curve crush continued unabated.
Then, overnight (literally), the entire dynamic shifted when the bid-to-cover in the BOJ’s POMO hit 3.58 from 2.93 the previous week, as sellers abounded. The rush to unload to Kuroda tripped the Osaka circuit breaker as JGB futures dropped 0.6%.
As Bloomberg’s Richard Breslow put it, “buying panic yesterday to front-run today’s QE buying led to panic selling today into BOJ bids 22 bps through Monday’s close. Oh, and did I mention, ahead of an auction tomorrow. The take-away is mayhem, not analysis.”
Yes, “mayhem.” Or “sheer absurdity,” brought on by monetary policy at the Keynesian brink. But most certainly not “analysis.”
Well just a little over a week later, the very same dynamic that sent yields up 8bps and sent the 10Y sliding, happened again overnight – only in reverse. This time around, nobody wanted to sell to the BOJ as the POMO bid-to-cover was just 1.53.
So with the selling impulse the lowest on record, yields of course plunged on what BofA’s Shuichi Ohsaki called “panic buying,” with the 10Y sinking more than 8bps through the (negative) depo rate to an all-time low of -0.135%. 20Y yields also hit record lows at 29bps.
Meanwhile, BoJ minutes showed that everyone at the NIRP meeting who agreed to go negative said rates can be cut more if necessary.
And it’s a good thing, because with the yield curve inverted and 10Y yields now below overnight rates, the market is screaming recession.
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