11 Nov 2017

A Sovereign Bond Puzzle (2 of 3)

Capital & Interest, Economics 4 Comments

Don’t worry kids, I’ll give you the punchline after this one. But I can see in the comments here that you people still aren’t getting what this has to do with Krugman on Kapital.

So, not a trick question: The 5-year Treasury yield right now is about 2%. The 5-year Japanese government bond yield is about -0.1%.

So how can this be possible? Do investors really think the US government is that likely to default? Why aren’t investors all over the world dumping Japanese bonds and buying US Treasuries, until the yields are equalized?

Or is there some other factor involved that would help explain why the rate of return could be different on different assets like this?

4 Responses to “A Sovereign Bond Puzzle (2 of 3)”

  1. Tel says:

    I would very much like to meet a regular Suzuki-san investor who chooses to buy Japanese government bonds by preference.

    There used to be a sense of nationalism and duty in the older generation of Japanese, but these days younger Japanese don’t feel that way. It’s the Bank of Japan buying, and maybe a few institutions that hold for a while then sell them on to the Bank of Japan. Basically, what I’m saying is that ridiculously low yield is not a market price, it is massively manipulated by central bank money printing.


    Scroll down to the last page, households (i.e. real people) only have 1.2% of the debt holdings. The BoJ is the biggest holder, then the private banks and insurance companies probably are forced to hold government bonds for regulatory reasons. The public pension fund holding government bonds is a bit of a laugh, that’s like my left hand lending to my right hand and calling it a “fund”.

    • Tel says:

      If you are willing to tolerate CNBC links…


      One reason for the plunge in yields is that JGBs are becoming scarce on the ground. As a result of the BOJ’s asset purchases through its planned 80 trillion yen ($712.16 billion) worth of quantitative easing annually, the central bank now owns more than a third of all outstanding JGBs. Other entities, such as pension funds, insurers and banks, must hold some JGBs as part of regulatory capital requirements.

      So for the most part, people “investing” in JGB’s are either doing so for political reasons, or because they are forced to. A small number of other private entities are front-running those big holders.

      It’s amazing to me that the BOJ can dump so much QE money without smashing the value of the Yen, but apparently that money dump just stays within some tight circle inside Japan somewhere.

  2. Keshav Srinivasan says:

    Is the answer that rate on bonds is determined by two markets, the loanable funds market and the liquidity preference market?

  3. Tel says:

    Here’s my argument why sovereign bonds make a poor example for the study of capital. Actually I should be slightly modest and admit this is not strictly my argument in as much as I’m borrowing but it fits my purpose and I’m sure the original owner won’t complain.


    Now let’s tweak our story yet again. Rather than our hypothetical 23-year-old setting aside a portion of his earnings in stocks, bonds, and other private-sector assets, instead suppose that the government confiscates some of his earnings while giving the 23-year-old its solemn promise that the government will fund his lifestyle and medical bills when he retires.

    Now if the government took the funds and itself invested in stocks, bonds, and other assets, it would be effectively be acting as a giant (and involuntary) mutual fund, and we would merely be arguing over whether the government versus citizens were better at investing for their future.

    Yet in reality, the government doesn’t invest the money it takes in payroll taxes the same way that a private individual would when saving for retirement. No; the politicians take these payroll “contributions” and they spend them right away. For example, they might send the money as benefit checks to current retirees, who can now afford to go out to more dinners and pay for medical treatment.

    Thus, when the government muscles in and takes over old-age financial planning, it greatly reduces the total amount of genuine saving and investment that occurs. Yes, the young worker still lives below his means, because he has money taken from every paycheck that is earmarked for social insurance programs (these deductions aren’t income taxes, but instead called “FICA” or “payroll taxes”). But the government’s programs then allow older people to simultaneously live above their means. So there is no net or aggregate savings occurring; the worker’s saving is offset by the beneficiary’s consumption.

    So clearly this undocumented author knows a lot about how the Social Security Ponzi scheme operates, but I’m putting forward that the exact same problem happens with government bonds, especially in cases like Japan where the main private holders of bonds are institutions under regulatory pressure, acting out of compulsion.

    There is no physical capital here! The government has just spent the money on consumption, hoping some different government can worry about the problem another day. We cannot have a meaningful discussion of capital by using examples where no genuine capital even exists.

    I’m happy to take on a range of examples, but let’s keep it real wherever possible.

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