coindesk.com
Donald Trump and his threats over Greenland and European Union tariffs make for the sexier headlines, but the Tuesday meltdown in the Japanese government bond market may be the larger signal as crypto and equity markets head sharply lower and precious metals soar.
"If markets have not been watching Japan, now is the moment," wrote Ole Hansen, head of commodity strategy at Saxo Bank. "The relentless surge in long-dated JGB yields signals that one of the world’s most reliable liquidity backstops is fading, with consequences that extend well beyond Tokyo."
For decades, beginning in 1990, a bet on falling Japanese bond prices was known as the "widowmaker" trade, as yields relentlessly fell (and prices rose) year after year despite massive fiscal and monetary stimulus. In recent years, though, yields have begun to creep higher.
The creep turned into a full gallop in Tuesday trade, with the 30-year JGB bond yield soaring nearly 31 basis points to 3.91%.
Combined with Trump-led drama, the news sent risk markets tumbling, with Japan's Nikkei shedding 2.5% and U.S. stock index futures pointing to roughly a 1.5% decline. Sporting decent year-to-date gains and holding above $95,000 for most of last week, the price of bitcoin BTC$90,931.28 has tumbled below $91,000 in early U.S. trading hours.
Precious metals continue to post new record highs, with gold gaining 3% to above $4,700 per ounce and silver higher by 7.5% and threatening $100 per ounce.
"Higher JGB yields raise the opportunity cost of funding carry trades and overseas investments that for decades have relied on Japan as the world’s cheapest source of capital," Hansen continued. "As yields rise, capital is pulled back toward home, draining liquidity from global markets almost by definition."
As for what policy options Japanese leaders have, Hansen said they’re limited. Should the Bank of Japan attempt to cap yields, he said, selling pressure would shift directly to the yen. And if they try to tighten monetary policy, more major bond market losses are likely. "Whichever route the Bank of Japan takes, the outcome is the same — tighter global liquidity," Hansen concluded.
"The old bank market adage is that yields will keep rising until something breaks," wrote Bianco Research head Jim Bianco. "Japanese yields are now at a 27-year high and going vertical. When does something 'break' in Japan?"