Something strange has unfolded in one of the largest sovereign debt markets on Earth. A bond market that once symbolized stability now trades like a ghost town. A mere fraction of normal trading volume triggered massive yield moves. In a multi-trillion-dollar market, only a few hundred million dollars in transactions were enough to cause violent price action. That is not a sign of a healthy marketplace. It is a sign that liquidity has evaporated and the structure underneath has hollowed out.
For years, ultra-low and even negative interest rates encouraged institutions to load up on long-dated government bonds. Central bank intervention absorbed more than half of the outstanding supply, leaving a market that looked large on paper but thin in reality. When yields finally began to rise, bond prices fell sharply. Holders of those bonds found themselves sitting on deep unrealized losses. Faced with that reality, the natural response was not to buy more. It was to step away and wait for clarity.
When the biggest buyers go on strike, even tiny amounts of selling can cause enormous dislocations. A market without depth turns a ripple into a wave. And volatility feeds on itself. Once price moves become violent, risk managers pull back, leverage is reduced, and selling pressure intensifies. The mechanics resemble a run on a financial institution. Not necessarily because everyone wants out at once, but because confidence in the structure disappears.
Yet the bond story is only half the problem. Currency stability is the other half. Attempts to support bond prices through renewed monetary easing would place immediate pressure on the national currency. That currency has already lost a substantial portion of its value over recent years, falling from roughly 100 to near 160 against the dollar. Further easing risks accelerating that depreciation .
This creates a trap. Support the bond market and the currency weakens. Support the currency and the bond market suffers. There is no painless path out. And because the bond market has been hollowed out by years of intervention, rebuilding genuine liquidity is not something that can be done quickly.
The question that follows is unsettling. If a small amount of selling can cause this much disruption, what happens if selling becomes large rather than small?
The answer leads directly to the next fault line.
