Bubbles in Bond Land—A Central Bank Made Mania, Part 1

by David Stockman

Last year Japan lost another 272,000 of its population as it marched toward its destiny as the world’s first bankrupt old-age colony. At the same time, the return on Japan’s 40-year bond during the first 6 months of 2016 has been an astonishing 48%.

Bubbles in Bond Land—A Central Bank Made Mania, Part 1This bond has no yield and no prospect of repayment, but that doesn’t matter because it’s not really a sovereign bond. These Japanese government bonds (JGBs) have actually morphed into risk-free gambling chips.

The BOJ already owns 426 trillion yen of JGBs, which is nearly half of the outstandings. That’s saying something, given that Japan has more than one quadrillion yen of government debt, which amounts to 230% of GDP.

Moreover, it is scarfing up the rest at a rate of 80 trillion yen per year under current policy, while giving every indication of sharply stepping up its purchase rate as it segues to outright helicopter money.

Virtually every scrap of Japan’s gargantuan public debt will go marching into its vaults never to return, and at ‘whatever it takes’ in terms of bond prices to meet the BOJ’s quotas.

Stockman discusses the big fat bid of the world’s central banks; the fiscal equivalent of a unicorn—scarcity in sovereign debt markets; and the pure lunacy of Mario Draghi.

The ECB is being cornered by speculators who are recklessly front-running the central bank, ready and waiting to sell. Everything in the European fixed income market is now so over-priced and disconnected from reality that Frankfurt dare not stop.

So this is a house of cards like no other. Greece remains a hair from the ejection seat, yet everything is priced as if there is no ‘redenomination’ risk. Likewise, with the European economies still dead in the water, and notwithstanding some short-term data squiggles, the debt of Europe’s mostly bankrupt states is priced as if there is no credit risk anywhere on the continent outside of Greece.


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