In a post that in retrospect was timed perfectly, yesterday we first warned that the BOJ may be about to unleash a bond “VaR shock”, one that would promptly lead to a global asset contagion, as a result of Kuroda’s surprising eagerness to steepen the yield curve, a move which would lead to an accelerated selling of the long end first in Japan, then across the entire world where some $13 trillion in bonds trade at negative yields. We also explained how “with cross asset correlation soaring, not to mention with risk-party and CTA funds approaching record leverage, the risk is that investors frontrunning a perceived change in the BOJ’s policy in two weeks time could lead to a dramatic selloff in JGBs, which then spreads across to global fixed income markets, all of which trade like connected vessels.”
The warning did not stop there: as we explained previously, in early June, Goldman warned that a sharp 1% spike in rates across the curve in the US alone, would result in MTM losses of $2.4 trillion. That excludes the crossover impact into stocks, as a selloff in bonds
leads to a correlated liquidation across equities, as a result of record leverage for Risk-Parity and other quant funds…
… for whom coordinated selling in both asset classes could lead to dramatic deleveraging, and a positive feedback loop of even more selling.
This post was published at Zero Hedge on Sep 9, 2016.