Japanese Bond Rout Continues; BoJ Vows to Curb Bond Turbulence; Curbing Turbulence is Theoretically Easy
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Curve Watchers Anonymous has been watching a major selloff in Japanese bonds. Here are a couple charts to consider.
10-Year Japanese Government Bond Yield
5-Year Japanese Government Bond Yield
Since March 4, the 5-year yield has gone from 0.1% to 0.43%. Although a mere .33 percentage points, the move represents a 330% percent rise in in yield.
One Month Changes
Charts courtesy of Bloomberg
Note: Those charts were snapshots taken last evening. This morning, yields have settled down, for now.
Bank of Japan Vows to Curb Bond Turbulence
NewsDay reports Bank of Japan vows market steps to curb bond turbulence
The Bank of Japan vowed yesterday to take necessary steps to reduce volatility in bond markets that has threatened to jeopardise the government’s fight to end deflation and revive growth.No Impact "Yet"
BOJ Governor Haruhiko Kuroda vowed to take steps needed to reduce volatility in the JGB market, but he disappointed some bond investors by sticking with the strategy of leaving it to BOJ bureaucrats to address the problem by tweaking the bank’s market operations.
Indeed, Kuroda played down any economic impact from the bond moves, where the benchmark yield recently had its biggest three-day spike in a decade as investors struggle to cope with the overwhelming impact of the BOJ’s radical money expansion.
“I don’t think the recent rise in yields is having a big impact on the economy,” Kuroda told a news conference after a two-day BOJ policy meeting.
In absolute terms there is not much impact, yet. However, I put an emphasis on the word "yet", a word Kuroda conveniently left out.
Curbing Turbulence is Theoretically Easy
It's theoritically easy to curb turbulence. Central banks can in fact control any single economic variable they want such as interest rates, money supply, or even the price of gold.
To control bond turbulence, all the Bank of Japan has to do is corner the market. To do so would be quite similar to the Swiss National Bank putting a cap on the value of the Swiss Franc or the Bank of China controlling the exchange rate of the Yuan vs. the US dollar.
To set a price, the Bank of Japan would have to be willing to buy every single bond offered at that price. It could pick any price it wanted, but the lower the interest rate, the more bonds it would have to buy. At a low enough price, it would have to buy every security.
Damn the Consequences
The problem with controlling interest rate turbulence (or any other factor) is the consequences. If the Bank of Japan does buy every Japanese government bond, it will have no control over things like the value of the Yen, the CPI, various asset bubbles that may form, or in the extreme case - Japanese hyperinflation.
If you reflect on what's theoretically possible for more than a second, you will see the practical ridiculousness of the Bank of Japan's statement on curbing turbulence. And what applies to Japan applies even more so the Fed's dual mandate of "low inflation and job growth".
Simply put, it is impossible for a central bank to control more than one variable at a time, and the consequences of controlling even a single variable are rather extreme when the market refuses to play along.
Mike "Mish" Shedlock