“Liquidity Is Becoming A Serious Issue” As Japan’s Bond Market Death Goes Global

 

 

 

 

 

” While we noted last week the death of the Japanese bond market as government intervention has killed the largest bond market in the world; it is now becoming increasingly clear that the dearth of trading volumes is not only spreading to equity markets but also to all major global markets asinvestors rotate to derivatives in order to find any liquidity. Central planners removal of increasing amounts of assets from the capital markets (bonds and now we find out stocks), thus reducing collateral availability, leaves traders lamenting “liquidity is becoming a serious issue.” While there are ‘trade-less’ sessions now in Japanese bonds, the lack of liquidity is becoming a growing problem in US Treasuries (where the Fed owns 1/3rd of the market) and Europe where as JPMorgan warns, “some of this liquidity may be more superficial than really deep.” The instability this lack of liquidity creates is extremely worrisome and likely another reason the Fed wants to Taper asap as DoubleLine warns, this is “the sort of thing that rears its ugly head when it is least welcome — when it’s the greatest problem.”

As Bloomberg reports,

Japan’s bond market is dead… and so is its stock and FX markets…

 

  The Bank of Japan’s unprecedented asset purchase program has released a creeping paralysis that is freezing government bond trading, constricting the yen to the tightest range on record and braking stock-market activity.

“ All the markets have been quiet,” said Daisuke Uno, the Tokyo-based chief strategist at Sumitomo Mitsui Banking Corp. “We’ve already seen the BOJ dominance of JGBs since last year, but recently participants in currency and stock markets are also decreasing as those assets have traded in narrow ranges.”

“ The flows on both the buying side and selling side continue to fall,” said Takehito Yoshino, the chief fund manager at Mizuho Trust & Banking Co., a unit of Japan’s third-biggest financial group by market value. “Falling volatility is a very serious problem for traders and dealers who are unable to get capital gains.”

The effects of the plunge in Japan’s bond market is hardly limited to the land of the Rising Sun …

The US is getting that way as the Fed owns one third of the market…

 

” And with that not only have the central planners broken the largest and historically most liquid markets in the world but have forced investors into leveraged derivatives positions (in order to find liquidity for their exposure-seeking) which themselves are entirely over-promise (relative to the underlyings) and under-collateralized with any quality collateral. As we concluded previously…

 
 

  Assume tomorrow the real black swan appears and all the liabilities: traditional and shadow, promptly demand collateral delivery. Well, the $11 trillion shortage would mean that risk values of, for example the S&P, would be haircut by a factor of, say, 75%. Or back to the proverbial 400 on the S&P500.

  Still think owning real high quality collateral, not of the paper but of the hard asset variety such as gold, is a naive proposition, best reserved for fringe lunatic, tin foil hatters and gold bugs?

Go ahead then: sell yours. “

 

 

 

Continue reading at Zero Hedge

 

 

 

 

 

 

 

 

 

 

 

—