Bond bubble manipulation du jour:
Japan's MOF Puts the Squeeze on Bond Traders: David DeRosa
July 11 (Bloomberg) -- Japan is reforming its government bond issuance process by recruiting banks that will be designated as primary dealers.
It's not clear how many will be chosen when the system starts in October. The government is using the bidding results from auctions between April and September to select them. Presumably, the more ravenous is a dealer's appetite for bonds, the greater is the chance to be designated a primary dealer.
Banks that become primary dealers will be required to individually commit to buying a minimum of 3 percent of each auction, regardless of the market for the bonds.
A dealer might find this oppressive. What if a dealer has met its 3 percent minimum allocation yet there are no customers for the bonds?
For years the Japanese government has been touting its bonds as a great investment. Why, then, would it need primary dealers to commit in advance to buying part of the auction? These bonds should sell like hot cakes.
Fewer Bonds Next Year
Statements made on Thursday by Vice Finance Minister Koichi Hosokawa constitute a pledge that the government will try to issue as few bonds as possible next year.
Said Hosokowa: ``We will maintain the stance of fiscal reform'' in discussing the next fiscal year's budget. ``Our basic stance is to limit bond sales as much as possible.'' In reference to Japan's debt burden, he said ``we can't loosen our grip on'' slowing the growth of public debt.
Listening to Hosokowa, one would hardly think dealers would have to be made to commit to minimum participation at auctions. It should be that the government would want to ration the amount of bonds any one dealer could gobble up. That, of course, is facetious. Japan is completely debt- ridden.
Its combined central and local government will reach 719 trillion yen ($6.6 trillion dollars) or 144 percent of national income by 2005, according to government projections.
A New Problem
That's not all. The Ministry of Finance now faces the new problem that bond yields are rising. As the old debt rolls off the books at maturity, new debt at higher costs will have to be issued.
So it's not surprising that Japan wants to create a primary dealer system. It's doing so for only one reason: to float a lot of debt.
Rising bond yields clearly scare the MOF, but this is part of Japan's entering a period of economic recovery. MOF can no more control bond yields than can the flow of the ocean's tides.
Still, MOF wants to be on top of the situation and, accordingly, it introduced new market surveillance regulations on Friday covering a broad swatch of fixed income trading.
Henceforth, institutions must report, not monthly, but weekly to the MOF on their bond trading. The new reports must include all trading in government bonds, bond futures, bond options and yen-interest rate swaps.
Fish Farm
And what's MOF going to do with this information? It's anyone's guess. This will be a huge pain in the neck and possibly more. What if the reports are leaked? MOF should give a formal guarantee that the information will be held in absolute confidentiality. Even with such a guarantee, that doesn't mean MOF itself won't use the information.
The only thing more frightening to a trader than someone in the market knowing his position is someone knowing the entire market's position. The point is, this weekly report could allow the Japanese authorities to game the market endlessly.
Underlying these measures and behind the imposition of the 3 percent rule for primary dealers, is an abstract notion that the bond community is nothing more than a fish farm to be managed by MOF.
Bond traders and fixed income investors, though, can simply swim away if they don't like the water. MOF either doesn't know this or doesn't care about the consequences. |
