Why This Sucker Is Going Down: The Case Of Japan's Busted Bond Market | Stockman

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So how did Japan sell billions of 30-year bonds given these catastrophic fiscal and demographic trends? The short answer is that it didn't sell anything to investors. Instead, it rented what amounts to a put option to fast money traders. The latter operate from the assumption that they can cop a capital gain in the next while and then sell the paper back to the BOJ.

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"Yields will continue to fall and the curve will continue to flatten under pressure from negative rates and quantitative easing," said Shuichi Ohsaki, the chief rates strategist at Bank of America Merrill Lynch in Tokyo. "Trading volumes will become even thinner. A typical bond investor probably wouldn't want to touch this market."

As of last night's auction, the entire JGB yield curve is now negative out to 13 years. That means that $5 trillion of bonds issued by the most fiscally impaired major government on the planet have been pushed into the netherworld of subzero returns.

... in a word, the central banks have nearly destroyed the government bond markets. In the process, they have flushed trillions of capital into corporate debt and equity in search of yield and momentary trading gains with scant regard for the incremental risks involved.