{"id":8784,"date":"2015-06-03T20:24:32","date_gmt":"2015-06-04T01:24:32","guid":{"rendered":"http:\/\/olduvai.ca\/?p=8784"},"modified":"2015-06-03T20:24:32","modified_gmt":"2015-06-04T01:24:32","slug":"bond-crash-continues-aussie-japan-yields-burst-higher","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=8784","title":{"rendered":"Bond Crash Continues – Aussie & Japan Yields Burst Higher"},"content":{"rendered":"

Bond Crash Continues – Aussie & Japan Yields Burst Higher<\/a><\/h3>\n

The carnage in Europe and US bonds is echoing on around the world<\/strong>\u00a0as Aussie 10Y yields jump 15bps at the open (to 3.04% – the highest in 6 months) and the biggest 2-day spike in 2 years.\u00a0 JGBs are also jumping, breaking to new 6-month highs above 50bps once again raising the spectre of\u00a0VAR-Shock-driven vicious cycles…<\/a><\/strong><\/p>\n

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The spectre of a self-feeding dynamic\u00a0<\/strong><\/u><\/a>is something\u00a0we\u2019ve discussed at length<\/a>\u00a0before, most notably in 2013 when volatility-induced selling \u2014 reminiscent of the 2003 JGB experience \u2014 hit the Japanese bond market again, prompting us to ask the following rhetorical question:<\/p>\n

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What happens to JGB holdings as the benchmark Japanese government bond continues trading with the volatility of a 1999 pennystock, and as more and more VaR stops are hit, forcing even more holders to dump the paper out of purely technical considerations?\u00a0<\/em><\/p><\/blockquote>\n

The answer was this: A 100bp interest rate shock in the JGB yield curve, would cause a loss of \u00a510tr for Japan’s banks.<\/p>\n

What we described is known as a VaR shock and simply refers to what happens when a spike in volatility forces hedge funds, dealers, banks, and anyone who marks to market to quickly unwind positions as their value-at-risk exceeds pre-specified limits.<\/strong><\/p>\n

Predictably, VaR shocks offer yet another example of QE\u2019s unintended consequences. As central bank asset purchases depress volatility, VaR sensitive investors can take larger positions \u2014 that is, when it\u2019s volatility times position size you\u2019re concerned about, falling volatility means you can increase the size of your position. Of course the same central bank asset purchases that suppress volatility sow the seeds for sudden spikes by sucking liquidity from the market. This means that once someone sells, things can get very ugly, very quickly.<\/p>\n

Here\u2019s more from JPM on the similarities between the Bund sell-off and the JGB rout that unfolded two years ago:<\/p>\n

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…click on the above link to read the rest of the article…<\/p>\n","protected":false},"excerpt":{"rendered":"

Bond Crash Continues – Aussie & Japan Yields Burst Higher The carnage in Europe and US bonds is echoing on around the world\u00a0as Aussie 10Y yields jump 15bps at the open (to 3.04% – the highest in 6 months) and the biggest 2-day spike in 2 years.\u00a0 JGBs are also jumping, breaking to new 6-month […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[86,6051,88,6052,5411,6053,2773],"class_list":["post-8784","post","type-post","status-publish","format-standard","hentry","category-economics","tag-bond-bubble","tag-bond-crash","tag-bonds","tag-european-bonds","tag-japanese-government-bonds","tag-us-bonds","tag-volatility"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/8784","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=8784"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/8784\/revisions"}],"predecessor-version":[{"id":8785,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/8784\/revisions\/8785"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=8784"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=8784"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=8784"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}