The Bank of Japan (BOJ) is rapidly losing control of long-term Japanese Government Bond (JGB) yields, and it’s a ticking time bomb that’s being shockingly ignored. This instability threatens to send shockwaves across the entire global financial system. While the markets focus on other concerns, this is the real story hiding in plain sight.
Japan’s 10-year bond yield has hit its highest level in years, now standing at 1.365%. While this may seem like a minor shift, it signals major trouble for global markets. The JPY carry trade leverage, once seen as an easy win, is now becoming more expensive to sustain. And the underlying assets—primarily USD Treasuries and Bonds—are sinking deep underwater. Forcing a liquidation in this scenario would trigger a financial nightmare, with financial institutions scrambling as insolvencies rise and credit spreads begin to widen. We’re talking about global consequences here, folks.
Why does this matter? Because the cost of borrowing in JPY to finance investments in USD, EUR, GBP, and other currencies has now skyrocketed. The idea of a “risk-free” carry trade has evaporated. This has destabilized the entire system, sending shockwaves through the markets. The BOJ’s struggle to control the long end of the yield curve has directly affected global financial stability.
With the BOJ’s failure to hold yields, we’re seeing institutions across the globe face significant liquidity challenges. They borrowed in JPY and invested in various global debts—bonds, treasuries, and gilts—believing that both Japan’s yields and global debt yields would remain stable. They couldn’t have been more wrong.
The chart on this shows how the BOJ lost control of long-term yields, and the consequences are brutal. We now face significantly higher costs to finance the trillions of dollars of leverage that global financial institutions have piled up, and it’s all in yen. The longer they wait to unwind these positions, the worse it’s going to get.
So why aren’t these institutions unwinding their positions yet? Here’s the kicker—they didn’t anticipate the illiquidity of their assets. Now, they’re stuck holding onto sinking investments and facing massive mark-to-market losses. They’re between a rock and a hard place, and that buffer of liquidity they’ve been using to keep operations going? It won’t last forever. As liquidity dries up, expect a cascade of forced sales, starting with USTs, EGBs, and GILTs.
The Bank of England (BOE) has already acknowledged this crisis by pledging to pump bailout liquidity into UK financial institutions. It’s a sad sign of things to come. Central banks have no choice but to keep bailing out financial institutions, but they’re running out of room. The last thing they can afford is more quantitative easing—it’s a quick path to hyperinflation, and the global economy just can’t handle that again.
The situation is getting critical. The BOJ’s inability to control long-term JGB yields is just the beginning. As we enter the final phase of this financial crisis, central banks no longer have the luxury to keep printing money without devastating consequences. Inflation, a weakened currency, and a collapse in purchasing power will hit citizens hard, as they pay for these endless bailouts.
Meanwhile, retail options traders are short the largest amount of gamma seen in at least the last 14 months, suggesting that a major market shift is just around the corner. Short $VIX positions have returned to levels last seen in July—right before the market dropped nearly 10%. A storm is brewing, and only those paying close attention will see it coming.
Tick, tick, tick.
Sources:
https://x.com/DarioCpx/status/1891321536948445312
https://x.com/Barchart/status/1891252924275130682
https://x.com/TradingThomas3/status/1891274841233240520
https://www.worldgovernmentbonds.com/bond-historical-data/japan/10-years/?utm_source=chatgpt.com