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The Bond Bubble Collapse Thread; Reset Time. This is the End of the Line for All the Rolling Bubbles Propped Up in the last 30 Years
Topic Started: 21 Aug 2016, 04:02 PM (11,435 Views)
b_b
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Interesting response from the BOJ. Essentially targeting the yield curve as opposed to just the cash rate.
http://www.businessinsider.com.au/heres-a-great-summary-from-citi-on-everything-the-bank-of-japan-just-did-2016-9

As the monopoly issuer of Yen, the BOJ can either choose to fix price OR volume. (Q)QE has historically been about volume which was always a nonsense as it came from the deeply flawed monetarist school (increasing money supply blah blah). Now the BOJ pivots to target price (yield).

Operationally different to targeting as cash rate which involves managing the reserve accounts of the banks. Not that is matters now as Banks have too many reserves which is hurting profits.

This should worry the Bond Bears. Anyone who actually understands the monetary system would know this option is generally available to CB’s (subject to mandate constraints). However overall the policy change does not mean much since;
- Bond yields reflect the long run cash rate expectation - so the BOJ indirectly controlled the curve anyway
- This will do nothing to create inflation.

After selling off initially, Yen is now rallying. Austrian style fund managers crushed again.
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Jon Snow
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b_b
21 Sep 2016, 09:27 PM
Interesting response from the BOJ. Essentially targeting the yield curve as opposed to just the cash rate.
http://www.businessinsider.com.au/heres-a-great-summary-from-citi-on-everything-the-bank-of-japan-just-did-2016-9

As the monopoly issuer of Yen, the BOJ can either choose to fix price OR volume. (Q)QE has historically been about volume which was always a nonsense as it came from the deeply flawed monetarist school (increasing money supply blah blah). Now the BOJ pivots to target price (yield).

Operationally different to targeting as cash rate which involves managing the reserve accounts of the banks. Not that is matters now as Banks have too many reserves which is hurting profits.

This should worry the Bond Bears. Anyone who actually understands the monetary system would know this option is generally available to CB’s (subject to mandate constraints). However overall the policy change does not mean much since;
- Bond yields reflect the long run cash rate expectation - so the BOJ indirectly controlled the curve anyway
- This will do nothing to create inflation.

After selling off initially, Yen is now rallying. Austrian style fund managers crushed again.
Yen is rallying because the Nikkei is rallying. Nikkei is rallying because the BoJ added commercial paper to it's box of tools for QE.

A CB buying commercial paper is a BIG deal. Most won't realise the significance of what happened today.

Japan lease company become first issuer of commercial paper with negative yield

When a corporation can issue CP at a negative yield, the obvious thing to do is buy back the stock, hence the rally in the Nikkei.
Speak when you are angry and you will make the best speech you will ever regret.
Ambrose Bierce
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b_b
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Jon Snow
21 Sep 2016, 10:42 PM
Yen is rallying because the Nikkei is rallying. Nikkei is rallying because the BoJ added commercial paper to it's box of tools for QE.

A CB buying commercial paper is a BIG deal. Most won't realise the significance of what happened today.

Japan lease company become first issuer of commercial paper with negative yield

When a corporation can issue CP at a negative yield, the obvious thing to do is buy back the stock, hence the rally in the Nikkei.
Shrinking a business is rarely the path the wealth no matter what the spreadsheet says.

Yes, low or negative yields good for borrowers - bad for savers. Since the private sector is a net saver (government a net debtor) there is income loss from this policy. Hence the outcome has been (and will be) deflationary.
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Jon Snow
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b_b
22 Sep 2016, 12:54 AM
Shrinking a business is rarely the path the wealth no matter what the spreadsheet says.

Yes, low or negative yields good for borrowers - bad for savers. Since the private sector is a net saver (government a net debtor) there is income loss from this policy. Hence the outcome has been (and will be) deflationary.
Agreed, but sometimes a business can become so productive with it's existing capital stock that financial capital is no longer a productive constraint. Given that debt at a negative yield is an asset, but equity also confers the right to vote how the business is run, it's a no brainer to buy back equity in these conditions.

As long as prices paid are also deflationary, it will offset loss of income.
Speak when you are angry and you will make the best speech you will ever regret.
Ambrose Bierce
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createdby
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http://www.afr.com/markets/debt-markets/top-rated-aussie-bonds-hit-by-rising-repo-costs-20160926-grp2zl
Top rated Aussie bonds hit by rising repo costs
Sep 27 2016 at 7:22 AM
Updated Sep 27 2016 at 7:22 AM
by Narayanan Somasundaram


Posted Image
The amount of sovereign debt outstanding is predicted to climb $72 billion to $499 billion in the 12 months through June 30, and reach $545 billion a year later, according to budget documents.
Michele Mossop

Time was, investors couldn't get enough of Australian government bonds that offer the highest yields among top-rated sovereign debt. Not any more.

Demand for the sovereign securities has dropped to the lowest since at least 2013, based on Reserve Bank of Australia data on short-term borrowing spreads for repurchase agreements. Supply is surging as the Australian government's debt pile climbs to almost $500 billion, while demand at home and abroad is weakening as yield premiums shrink and stricter regulation deters banks from holding more debt than they absolutely must.

Repurchase agreements - where bond investors borrow cash and offer their government notes as short-term security - are a key money market transaction that can shed light on changes in liquidity and demand. The amount that holders of Australian government debt pay to counterparties to raise funds using their bonds as collateral rose to as much as 26 basis points more than the cash rate this month, the biggest gap on record in RBA data that stretches back to November 2013. In 2014 the spread averaged about 3 basis points.

"Banks have seen a reduction in the ability to warehouse risk," said Martin Whetton, a Sydney-based interest-rate strategist at Australia & New Zealand Banking Group. "Increased issuance of Australian government bonds and a higher percentage of the market being held domestically have also contributed to a rationing of balance sheet."

Significant issues surrounding the spreads over cash that are referred to as repo rates have so far been rare in Australia, apart from some short-term squeezes in individual bonds. There are now signs of pressure though. Lower yields are spurring fund managers to tap the repo market in a bid to supercharge their returns, and that's combined with increased sovereign issuance to jack up supply. Add to that diminished appetite from offshore buyers and circumscribed banks, and you have a recipe for wider spreads.

"Repo provision is becoming a scarcer commodity and the cost of providing repo is likely to remain elevated," according to Whetton.

Sovereign debt set to climb

Repos allow investors to use bonds as collateral and receive cash in return. That money raised can used for liquidity, or to purchase other assets and allow investors to make use of the short-term arbitrage opportunity. The RBA is the major liquidity provider in the domestic repo market and conducts about $2 billion per day in open market operations. While it hasn't reduced the liquidity it provides, there's nonetheless been an increase in repo rates due to other pressures.

Australia's banks - among the largest holders of the domestic government bonds - are being curtailed by stricter global rules that limit their capital market activities. While the lenders still invest in these securities to meet liquidity requirements, they're less active in trading them.

This decline in bank capacity has dovetailed with increased issuance as the government seeks to finance its ballooning budget deficit. The amount of sovereign debt outstanding is predicted to climb $72 billion to $499 billion in the 12 months through June 30, and reach $545 billion a year later, according to budget documents.

Foreign buying has struggled to keep pace with the increased amount of fundraising and the proportion of federal securities held by non-resident investors in the second quarter fell to just 59 per cent, the least since 2009, according to official data. The average yield premium 10-year Aussie debt offers relative to eight other AAA sovereign markets reached a seven-year low of 1.36 percentage points in August. It was at 1.52 on Monday, down from 1.78 at the end of 2015.

Investor activity at the government's regular bond auctions has also weakened. Buyers at non-inflation linked bond auctions in 2016 have submitted bids to buy an average 2.9 times the amount of debt on offer at each sale, the lowest mean ratio since 2002, Australian Office of Financial Management data show.

"Elevated repo rates are likely to become a more normal feature of the market landscape," said Alex Stanley, an interest-rate strategist at National Australia Bank in Sydney. "A large influx of cash bonds into the market amid a relative decrease in demand from global investors has contributed to the attractiveness of bond basket arbitrage trades and added pressure to repo rates."
Edited by createdby, 28 Sep 2016, 04:23 PM.
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b_b
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http://www.afr.com/markets/debt-markets/huge-interest-in-australias-30year-government-bond-20161011-gs07y5

Demand roughly double the size of the issue - what a shock!!!

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Rufus
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b_b
13 Oct 2016, 12:44 PM
Which begs the question, could we establish a 30 year mortgage bond market at attractive rates?
Take risks - if you win you will become wealthy, if you lose you will become wise
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b_b
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Rufus
13 Oct 2016, 01:06 PM
Which begs the question, could we establish a 30 year mortgage bond market at attractive rates?
It is certainly going to be helpful for commercial issuers who seek duration. Particularly our banks who have been encouraged to needlessly issue offshore pushing up the Xchnage rate, and importing potential financial instability.

Overall, a good development for Australian capital markets.
Edited by b_b, 13 Oct 2016, 02:10 PM.
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Sydneyite
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b_b
13 Oct 2016, 02:10 PM
It is certainly going to be helpful for commercial issuers who seek duration. Particularly our banks who have been encouraged to needlessly issue offshore pushing up the Xchnage rate, and importing potential financial instability.

Overall, a good development for Australian capital markets.
Agreed! And about time as well!
For Aussie property bears, "denial", is not just a long river in North Africa.....
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Simon_S
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b_b
13 Oct 2016, 02:10 PM
Particularly our banks who have been encouraged to needlessly issue offshore pushing up the Xchnage rate, and importing potential financial instability.

Interesting statement............

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