A Conundrum - " Who buys Negative interest rate Bonds ? "

  As many of you are aware, main buyers of Government's Bonds ( GB ) are Banks. It is said the amount of " Negative Rate GB " have been piled up to $17 trillion ( ≓ ¥1,800 trillion ). Most of them are issued in € (EGB = $10 trillion) and ¥ ( JGB = $7 trillion) .

  Why do Banks need to buy such " Negative Rate GB " then ?

  EURO case is more comprehensive. ECB charged @▼0.50％ on "Excess Reserve" for €1trillion which costs European Banks for €▼5 billion annually. They need to buy EGB > @▼0.50％ to reduce the costs. And majority of "Negative rate EGB " are managed as Trading Inventory under MTM ( Mark-to Market).

  The situation is quite different in Japan. Bank of Japan ( BOJ ) splits the current accounts into " 3Tiers " ( attached Graph above the title) as :

 1st  " Basic Balance "  = @+0.10%  e.g. 210 trillion @30 Sep 20

 2nd " Macro Balance " = @0.00%    e.g. 247 trillion @30 Sep 20

 3rd " Policy Balance " = @▼0.10％   e.g. 30 trillion @30 Sep 20

 All in All, BOJ never costs Japanese banks, but even give +180 billion annually. Although, still " Negative rate JGB" for more than ¥700 trillion remains. MTM accounting is not major in Japan, but under Accrual, where Negative rate JGB could never make money. So, a Conundrum is : 

  Who buys  " Negative rate JGB " ?

 ( Sorry Japanese above ↑ ) Brown share is " Overseas Investors " , which are reasonable for them to enjoy *Arbitrage trades with enough profits, by swapping their US$ into JGB.

  * As Japanese banks invested their Excess JPY into US Bonds for the SIZE ( guessed ¥300~400trillion) , using USD/JPY Basis Swaps or FX Forward, the market prices contains lots of US$ premiums, e.g. $LIBOR + 30 ~ 50 BP.  So JGB's are no longer Negative rate bonds for US$ holders, but one of the very attractive High yield Bonds.

  Arbitraged JGB by overseas are calculated as ¥116 trillion and BOJ hold ¥300 trillion, Collateral needs ( at BOJ, ISDA CSA etc. ) looks about 120 trillion out of ¥700 trillion.  While, still ¥160 trillion remain as " Negative rate ", which are too large to ignore...  Why ?

  As long as I survived in " JPY Community " , Japanese tend to Tolerate till the last second " Together ".

 " Japanese cross the street with Red Light on, if everyone crosses " 

  This is a kind of Joke, but also truth. In Japan, Everyone needs to be " The SAME " ( not " Fair " nor " Equal " ), especially in Japanese banks.

  In this case, every Japanese bank " Tolerate ", not selling Negative rate JGB in " The SAME way ", to Cooperate with BOJ and / or MOF ( Ministry of Finance ), which is more important for them than Trading profits. 

  It's OK to lose money if everyone lose ( but "steal a march" is NOT OK ).

  As a result, JPY markets move in very "Odd" manner. When time comes beyond the Tolerance, suddenly markets started to "Collapse" with huge volatility in One Way. 

 " One sells JGB, if everyone does. " 

 This is the Very Dangerous aspect of JPY markets, but also curious if you recognize it. We call it " T.I.J. " = This Is Japan.  Especially for Non-Japanese traders or investors who trade JPY products, I believe this could held much.     Good Luck !