The Bank of Japan may or may not be tapering, but that may soon be moot because by the time Kuroda decides whether he will buy less bonds, the bond market may no longer work.
As the Nikkei reports, while the Japanese central bank ponders its next step, the Japanese rates market has been getting "Ice-9ed" and increasingly paralyzed, as yields on newly issued 10-year Japanese government bonds remained flat for seven straight sessions through Friday while the BOJ continued its efforts to keep long-term interest rates around zero.
The 10-year JGB yield again closed at 0.055%, where it has been stuck since June 15m and according to data from Nikkei affiliate QUICK, this marks the longest period of stagnation since 1994,
Because what comes after record low volatility? Simple: market paralysis. And that's what Japan appears to be experiencing right now as private bondholders no longer dare to even breathe without instructions from the central bank. Meanwhile, the implied volatility of JGBs tumbled to the lowest level since January 2008 for the same reason we recently speculated may be the primary driver behind the global collapse in volatility: nobody is trading. This means that trading in newly issued 10-year debt has become so infrequent that broker Japan Bond Trading has seen days when no bonds trade hands.
It's not just cash bonds that find themselves in trading limbo: trading in short-term interest rate futures has also thinned and on Tuesday of last week the Nikkei reports that there were no transactions in three-month Tibor futures - the first time that has happened since such trading began in 1989.
The three-month Tibor, or Tokyo interbank offered rate, has not moved in the nine months since the end of September 2016. There were just a few trades last Friday, and it was only a matter of time until the number hit zero. The absence of volatility makes it hard to profit from bets on the direction of interest rates. Alternatively, the death of trading means volatility has crashed to all time lows.
Trading in even shorter-term contracts is also ebbing. The Tokyo Financial Exchange announced on Thursday that starting at the end of July it will suspend trading of futures based on Japan's uncollateralized overnight call rate, the interest that financial institutions charge each other for loans with a one-day maturity. The exchange will consider restarting trading if it can confirm demand.
As more market participants throw in the towel on a rigged, centrally planned market, the result will - no could - be a further loss of market function, and a guaranteed crash once the BOJ and other central banks pull out (which is why they can't). As the Nikkei politely concludes, "if the bond and money markets lose their ability to price credit based on future interest rate expectations and supply and demand, the risk of sudden rate volatility from external shocks like a global financial crisis will rise."
Translation: in a world where only central banks trade, everyone else is destined to forget forget what trading, and certainly selling, means.
Meanwhile, the "grinding halt" in the market is not just a Japanese phenomenon. As we showed a month ago, quarterly portfolio turnover among hedge funds just dropped to the lowest ever.
And yet, in a world which no longer wants, or even remembers how to trade, central banks jawbone with threats that they are soon pulling the training wheels off the market. Somehow we very much doubt it.