JGBS AUCTION: Weak Demand Metrics For 10Y Auction

The Japanese Ministry Of Finance (MoF) sells ¥600.6bn 30-Year JGBs:

• Average Yield: 2.414% (prev. 2.500%)
• Average Price: 99.75 (prev. 96.57)
• High Yield: 2.457% (prev. 2.508%)
• Low price: 99.00 (prev. 96.45)
• % Allotted At High Yield: 33.8235%  (prev. 92.5925%)
• Bid/Cover: 2.9582x (prev. 3.4997x)

Over the last 15 years there has been a mass migration to passive funds in the trillions of USD’s. The growth in these funds have been extraordinary at the expense of the active funds and in 2024 total assets in passive mutual funds and ETF’s surpassed those in active ones.

• With the allure of low fees, broad diversification and liquidity, Risk Parity became the new buzz word.
• The Cons though are beginning to mount. Capital floods into the same names, amplifying market weightings.
• No fundamental discrimination, it will buy whatever the index holds regardless of macro risks or price discovery. As long as money comes in the fund continues to pay the highs.
• This all works very well in a 15 year bull market that has consistently been protected by the FED put.
• What happens in a bear market ? Redemptions spike and just like when they buy on the way up at the highs, there is no fundamental discrimination on execution so as redemptions hit the fund will sell at the lows.
• This can amplify downside risks to the market especially in the names that are most heavily held. 
• As you can see from the graph below Risk Parity has put in a lower high around the 850 area and is now looking to break below its pivotal 750/750 support. A move back through here would see redemptions begin to increase and the negative feedback loop in stocks would add a serious headwind to risk.

Risk Parity Index

Source: MNI - Market News/Bloomberg

China’s banks face additional loan demand and net interest margin pressure after the U.S. imposed reciprocal tariffs, said Dai Zhifeng, director at the Zhongtai Securities Research Institute, adding that asset quality was expected to remain stable. Banks with higher foreign trade exposure will be hit more significantly than those with a high proportion of retail customers, Yicai news agency reported, noting that more than half of banking stocks fell on April 7 by more than 5%.