Chinese bonds face "liquidity illusion" shattering: $72 trillion market collapses with just $2.8 billion in trading volume.

Despite the total size of the Japanese government bond market reaching $72 trillion, trading volume of just $2.8 billion was enough to cause extreme volatility and almost a collapse in the market. On Tuesday, Japanese benchmark ultra-long term bonds plummeted, with a total turnover of $41 billion, causing global market turmoil. The failure of the bond market has pushed yields to record levels, further deepening concerns about Japan stepping into a "Liszt-Trans moment". The so-called "Liszt-Trans moment" refers to a period when the UK's government bond market experienced violent fluctuations due to policy errors. This situation has also prompted US Treasury Secretary Scott Benet to investigate the reasons behind this extreme volatility, which he described as a six standard deviation event. It is known that the Japanese government bond market has long suffered from a lack of liquidity, often experiencing low trading activity, making it a weak link in the global financial system. The significant gap between the bond price plunge and actual trading volume serves as compelling evidence. For years, the Japanese government bond market has been constrained by the massive stimulus policies of the Bank of Japan. Now, as the central bank and domestic life insurance companies withdraw funds, this massive, globally third-ranked government bond market has become more fragile and vulnerable to external shocks. Shoki Omori, Chief Trading Strategist at Mizuho Securities in Tokyo, stated, "It's not a paradox: under conditions of insufficient market depth, balance sheet constraints for trading firms, and prices determined by marginal trading rather than volume-weighted averages, this is the result you would expect." Data shows that on Tuesday, the most watched 30-year bonds in Japan had a trading volume of only $170 million, while the 40-year bonds had a trading volume of $110 million. Although the trading volume of these bonds has increased compared to recent trading days, it is only a small fraction compared to the $41 billion trading volume on the same day for 10-year Japanese government bond futures. However, during the trading session on Tuesday, the 30-year and 40-year bonds suffered heavy blows, with many market participants stating that it was the most chaotic market they could remember. In this intense market downturn, the yields of these two bonds surged significantly, increasing by more than 25 basis points. However, market trading gradually returned to calm afterwards. It is worth mentioning that an index used to measure the difference between Japanese bond yields and theoretical values soared to a historical high this week, indicating a further worsening imbalance in the current market situation. New Normal Traders and analysts in Tokyo are still puzzled about who is behind the massive selling. Rumors circulate in the market, pointing to major trading firms, hedge funds, and domestic life insurance companies as the culprits behind the selling spree. There is little controversy over the wide-ranging causes of the market turmoil: Japan's adjustment of policies to accommodate higher inflation levels has led to an increase in interest rates, disrupting the market's calm state over the years. Japanese Prime Minister Sanae Takashi plans to temporarily suspend consumption tax on food and beverages in an effort to gain more public support before next month's early election. However, this move has further exacerbated concerns about the direction of fiscal policy. Investors now have to face and adapt to this historic change in the way Japanese government bonds are traded. Analysts at JPMorgan pointed out in a report released this week that the market breadth indicator measuring the impact of price changes on trading volume deteriorated sharply. This situation means that even a small amount of fund flow can significantly affect long-term bond prices, unlike the strong breadth seen in the US and German government bond markets. According to data released by the Japan Securities Dealers Association, foreign investors currently account for about 65% of the monthly cash trading volume in Japanese government bonds, compared to just 12% in 2009. Previously, this sector was dominated mainly by domestic life insurance companies, but now it is increasingly being driven by investors with relatively short investment horizons. Stefan Angele, Senior Economist at Moody's Analytics, pointed out, "This is not a unique problem facing Japan; in the United States, we also see similar situations. Currently, the government bond market is increasingly dominated by buyers who act much faster than the traditional market investors. This trend is expected to continue for some time." These figures do not cover the entire scale of Tuesday's Japanese government bond trading. In addition to the trades mentioned in the data, there are also so-called off-the-run government bond trades, but the activity level of these trades is usually much lower. Furthermore, some investors also use interest rate swaps to bet on interest rate trends. The turbulent selling wave on Tuesday caught some hedge funds off guard, forcing them to close out positions hastily to limit losses; this situation also prompted life insurance companies to sell off bonds in their portfolios; it triggered a chain reaction, causing at least one corporate bond investor to abandon a transaction worth millions of dollars.