If you prefer your Capital & Conflict as a video, you can watch a seven minute version of today’s letter here on YouTube or here on Facebook. I recorded a video today because it felt like one of those quietly important days in the market that merits some serious examination. Why?
Because the government of Japan may have accidentally burst its own bond bubble.
Yes, you’re right. I should know better than to claim Japanese bond prices can’t go higher. As Tim Price wrote earlier this week, betting against Japanese government bonds is not known as “the widowmaker trade” for nothing. It’s a dangerous (and usually wealth-destroying) game.
But here’s why you should pay close attention
Prime minister Shinzo Abe announced a $276 billion stimulus package yesterday. And then ten-year Japanese government bond (JGB) yields spiked. They – ye gads – almost went into positive territory.
“JGBs saw their worst sell-off in more than three years on Tuesday against a backdrop of fear that the Bank of Japan might reduce the pace of its aggressive government bond buying,” according to Reuters. Order was restored by the end of the trading day in the bond market. Ten-year yields closed safely negative.
Remember, the Bank of Japan ordered a “comprehensive review” of its QE programme last week. Let me repeat, I believe this marks the end of QE as we know it. It could trigger an epic sell off in bonds. And it may mark the beginning of a new fiscal assault on savers and investors through larger deficits, helicopter money, and redefining the nature of money itself.
Increasing anxiety
Don’t expect the Bank of England to do anything nearly as dramatic tomorrow. It’s in a different position and faces a slightly different problem – increasing anxiety over the performance of the British economy in the 2nd half of 2016. The market still expects the BoE to cut its benchmark rate to 0.25 basis points.
But if bond prices around the globe begin falling because investors believe central bankers have lost control, the biggest story in the world just happened in Japan. And it has global ramifications. It means the monetary endgame is well and truly underway. Money could come flooding out of bonds. But to where? More on that tomorrow.
Category: Geopolitics