Japan's QE On Verge Of Failure As Nobody Wants To Sell To The BOJ

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Japan's QE On Verge Of Failure As Nobody Wants To Sell To The BOJ

Over a decade since central bankers started a stealthy nationalization of capital markets by purchasing a wide range of securities from Trasuries, to MBS, to corporate bonds, to ETFs and single stocks, their actions are finally catching up to them, and in the process breaking the very markets central bankers have worked so hard to prop up. And nowhere is this more obvious than in Japan, where the s

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hrinking universe of Japanese government bonds (as a reminder the BOJ now owns more than 100% of Japanese GDP in JGBs) is "causing havoc" in Japanese money markets as the Bank of Japan continues to buy while dealers refuse to sell.

The result is that rates in Japan's repo market, which traditionally connects holders of bonds with investors looking to borrow them, jumped to a record Tuesday (although they since retreated on Wednesday) because as Bloomberg notes, "the introduction of cheaper, more regular dollar-swap auctions has generated huge demand from U.S. currency-starved dealers who are keeping their JGBs to put them down as collateral."

So here is what the math looks like now that the Fed has launched enhanced swap lines with central banks such as the BOJ, allowing local entities to obtain dollar funding at much lower rates: in last week’s first round of the Fed’s revamped dollar-swap auctions, banks borrowed greenbacks for about 3-months at 0.37%, a massive discount to the near 2% it would cost them in the currency swap market. $32 billion was alloted in the first operation.

This huge difference in available borrowing costs, highlighted in yellow in the chart above, means JGB holders who still haven't offloaded to Kuroda are now unwilling to participate in the BOJ’s bond purchases.

This was readily apparent in Monday’s Rinban operation (i.e., Japan's POMO) across 5-to10-year bonds which saw the lowest offer-to-cover ratio on record, as dealers refused to sell to the BOJ! Other tenors also saw a sharp drop in the amount of bonds offered to sell.

"Demand for JGBs as collateral and its importance now is heightening." SMBC Nikko rates strategist Souichi Takeyama told Bloomberg. And here is the big problem that is now facing the BOJ: "There is little incentive to sell to the BOJ because there are more effective ways to make use of JGBs."

In other words, unless the BOJ provides dealers with a substantial "pick up" in principal relative to market prices, dealers will simply hold on their bonds as they can earn far more by simply renting the bonds out than purchasing any comparable securities. However, that would be frowned upon as it would constitute a clear subsidy to the local banks which, ironically, have been crushed in recent decades by the lack of net interest margin with the entire Japanese yield curve trading flat.

Making matters worse, the surge in demand comes at a time when the Bank of Japan is stepping up its own JGB purchases, in its bid to provide liquidity to financial markets grappling with the worsening coronavirus outbreak. However, with banks now openly refusing to sell to the BOJ, either the Japanese QE will fail, or bond prices will have to rise much more, pushing yields even lower, and further impairing bank interest margin calculations. On net, as Bloomberg notes, "that means less supply available for Japanese banks who have so far tapped over $150 billion in ultra-cheap dollar funding."

The bottom line, according to Takeyama, is that "there is risk that the BOJ offers may not get sufficient bids."

In other words, we may have finally hit a point where the market becomes self-stabilizing, as the very mechanism that central banks used to nationalize capital markets results in so much distortion that market participants no longer have an incentive to use it. In short, QE in Japan, which was first among the developed nations to hit the zero bound (and drop below it) and the first to exponentially ramp up bond purchases, is now on the verge of failure.

Tyler Durden

Wed, 03/25/2020 - 11:45

EU On Verge Of Huge Tactical Brexit Mistake

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EU On Verge Of Huge Tactical Brexit Mistake

Authored by Mike Shedlock via MishTalk,

For a while it appeared the EU was ready to negotiate with Johnson. Perhaps appearances were deceiving...

Only Way to Bridge the Backstop

Last Friday, Eurointelligence commented:

We would agree that the risk of a no-deal Brexit on October 31 is van

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ishingly small, but risk of it happening eventually is rising. At Eurointelligence we have been warning for some time that the risks of a no-deal Brexit have been widely underestimated. But we were cautious not to elevate the no-deal scenario to becoming our baseline.

If the EU were to reject the current proposal flat out, that would change. The EU should consider very carefully that Johnson yesterday managed to receive support not only from the DUP, but also from the rebel Tories who lost their whip over the Benn extension legislation. The EU does not want to give Johnson a believable excuse for a no-deal Brexit: having come up with a reasonable proposal whose rejections indicates that the EU was not serious even to engage with the idea of a dual border - one for customs and one for regulation. We think that duality is not only a reasonable starting position, but in fact the only way to bridge the differences over the backstop.

The amount of trade between the UK and the EU was over £600bn. Intra-Irish trade flows were about £5bn. Should the EU really want to endanger a large portion of the £600bn on the grounds that it is possible to blame Johnson for a no-deal Brexit? That would strike us as an entirely irrational strategy.

Last Minute Magic Deals

My position has been that deals in the EU magically happen at the last second after everyone gives up on them. I also cited trade differential noting in particular German Carmakers Warn “Seismic” and “Devastating” No Deal Consequences

We have seen that time and time again, with German Chancellor Angela Merkel or someone else moving from a fixed position at the end.

It almost has to be last minute because all 27 nations have to agree to do damn near anything. It's a fundamental flaw of the EU that cannot be fixed because all 27 nations would have to agree to fix it, and they won't. France insists on agricultural protections and German insists on budget protections.

France Enters the Fray

After movement towards a deal last week, France seems to have hardened its position. French President Emmanuel Macron told Johnson that his offer was not even a starting point.

Johnson warned 'Don't Be Lured Into the Mistaken Belief that the UK is Staying in the EU'.

Foolish Notions

Unfortunately, that appears to be precisely what has happened. The EU is taking its cues from Remainers who are hopelessly splintered.

Let's check back in with the Monday morning Eurointelligence view, emphasis mine.

This morning, the Telegraph reports that he is now preparing to launch legal action against the Benn Brexit extension bill. We don't think that this has any chance of succeeding, but the point of this action is political: he is seeking to demonstrate that the organs of the state conspire to subvert Brexit. The article suggests that Johnson may himself give evidence to the court. What appears to be a chaotic strategy has the sole purpose to demonstrate that he is doing his best to deliver Brexit.

So this is now our most likely scenario - from today’s vantage point: the EU does not agree to a deal; Johnson is dragged kicking and screaming into an extension; he wins the ensuing elections; a no-deal Brexit follows.

Most Likely Scenario - No Deal

That is the first time Eurointrelligence has held that view.

Wolfgang Munchau writes that the EU should not dismiss the underlying idea in Boris Johnson’s offer: the separation of a customs border from the regulatory border. The proposal itself cannot be a final offer.

Munchau writes the EU can only politically agree withdrawal agreements that keep the UK aligned as closely as possible with the EU. France fears that the UK might seek a competitive advantage after Brexit. The conclusion is that the EU will always extend the Brexit deadline but, as Munchau says, that strategy is short-sighted and ultimately self-defeating.

In particular, it critically misjudges UK politics. Opinion polls continue to show a widening lead of the Tories over the opposition parties. An Opinium poll in the Observer also showed that Labour has regained its lead over the LibDems. What we think is widely underestimated in Brussels is that the current alignment in UK politics strongly favours a no-deal Brexit. The chaos in British politics is benefiting Johnson more than it benefits opposition leaders. With every court battle, we expect Johnson to consolidate his political position.

Consolidating Political Opinion

Something happened today in the UK parliament that show the extent of political power consolidation. A Tweet chain has the results.

21 Expelled Tories Will Not Let MPs Seize Control

Political Reality

  1. The rebel ex-Tories will not go along with an Parliament takeover

  2. Jo Swinson and the Liberal Democrats have repeatedly rule against a caretaker government led by Jeremy Corbyn

  3. Jeremy Corbyn refuses to support any caretaker government unless led by him

  4. There is now actually Parliament support for the deal proposed by Johnson

Note the irony of point 4.

Theresa May and the EU had a deal that Parliament would not accept. Now Johnson and Parliament has a deal that the EU will not accept.

The DUP, rebel Tories, hardline Tories, and even some Labour MPs are all willing to go along with an Irish Sea solution.

As noted in Brexit Irony: EU Rejects Its Own Proposal the EU proposed a border in the Irish Sea and Theresa May rejected that offer because DUP would not go along.

Theresa May instead accepted the worst possible deal for the UK.

Miscalculation or On Purpose?

France may very well want the UK out on a hard deal for reasons we don't fully understand. That said, Germany does get hit harder than France in a No Deal setup.

Possibly it's just a large last-minute bluff.

But perhaps Eurointelligence has this right. The EU has seriously misjudged UK politics.

And that's another irony in this mess. It was the UK who for the longest time misjudged the EU.

The final irony is that by attempting to take "No Deal" off the table, Remainers just may have sealed the fate.

Even the expelled Tories have had enough.

Two Lies Exposed

It's now clear that taking No Deal off the table was a gigantic lie from the start.

  1. Labour, SNP, and some of the expelled Tories did not want to block "No Deal", they want to remain.

  2. If Ireland will not go along with Johnson's offer, then it never would go along with anything. This exposes the Backstop for what it really is: A lie to keep the UK in perpetual limbo forever.

Tyler Durden

Tue, 10/08/2019 - 05:00




A Fake Letter To Fake Employees On The Verge Of A Modern IPO

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A Fake Letter To Fake Employees On The Verge Of A Modern IPO

Authored by Jason Gay of the Wall Street Journal


To the staff:

Folks, I know everyone was excited about cashing in on our upcoming public offering, but it looks like this whole “profitability” craze is here to stay, at least for a while. We’re going to have to delay the IPO. Believe me, I am as disappointed as you are. I’d alrea

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dy picked out four private islands! Which technically would have been—yes—my own archipelago. Sigh.

In the meantime, we’re going to have to tighten up until this businesses-should-make-money fad blows over. Here are some company-wide decisions, effective immediately:

After great consideration, we are going to sell the private jets. This is a decision that is both symbolic and practical. It was not a good look for us to own a fleet of Gulfstreams. It was especially not a good look for us to fly them to Rome for Thursday pizza nights.

We are also going to sell the company elephant, Bobo. We all loved him, and he was fantastic at staff birthday parties, but Bobo was becoming a bit of a distraction in the office. And let’s face it: the smell.

Our founder has emailed to ask that you no longer refer to him as Supreme Genius Being of Gaia. He’s back to being Dennis.

Also: Dennis’s 2020 independent presidential campaign has NOT ended. It’s simply “suspended.” (Admittedly, I do think Dennis got a little bored and forgot he was running.)

Remember, Dennis is still in month three of a two-year executive vow of silence, so do not expect a verbal response from him on any of these topics.

Those of you who “borrowed” a company Bugatti from the company Bugatti share, please return it ASAP.

We need to put a good public face on our situation. If a stranger mentions the IPO delay and asks you what our company is really about, take a good look at the their footwear. If they’re wearing dress shoes, say “we’re a revenue-based subscription model.” If they’re wearing sneakers, it’s still OK to say “we’re a lifestyle brand.”

I don’t know what a “lifestyle brand” is, either, but if you get stuck, just say “it’s like Nike meets Netflix.”

If they keep asking questions, just run and hide behind a tall plant.

Really, all you need to know is this: We are not launching a chain of fast-casual vegan restaurants on the moon in November. It’s delayed indefinitely.

Same goes for the cat yoga studios. We’ll workshop those internally, with stuffed cats.

There will no longer be a manager’s retreat in Gstaad, Switzerland. It will be at Applebee’s.

We are not going to be breaking ground on HQ 2.0. Wall Street did not seem terribly enthused with Dennis’s idea for a Frank Gehry-designed underwater office building with a private missile defense system and a dolphin launch.

Playing beer pong on Friday afternoon is still OK. But please stop playing Pappy Van Winkle 23 pong. And no more Ortolan Wednesdays.

I regret the Rolling Stones will not be playing the Holiday Party, as previously announced. Instead, it will be Side Door, the band Dennis’s son founded with his teammates on the USC crew team.

Ashton Kutcher is STILL visiting the office on Tuesday. Smiles, everyone! And zipped lips about Bobo. Bobo loved Ashton.

Last but not least, and you probably saw this coming, but we will not be furnishing company logo fleece vests for the winter.

I know this stresses some of you out. Because of this, we will be returning carbohydrates to the cafeteria.

Tyler Durden

Sat, 10/05/2019 - 22:30

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