Did the Japanese Try to Dump $135 BILLION in US Bonds on the Black Market?
Last Friday morning, Treasuries rallied as the Japanese Minister of Finance Kaoru Yosano went on the public record to say that his faith in US Treasuries and America’s ‘strong dollar policy’ was ‘unshakeable’.
As far as I could tell, the Bloomberg article did not indicate that this statement was in response to any recent event, challenge, rumor or inquiry. In fact, it appeared to materialize out of the ether. The article stuck in my memory specifically because the Japanese opposition, the Democratic Party of Japan, issued a proclamation on May 12, 2009 to the effect that if elected, they would refuse to buy US government bonds. I dismissed it at the time as populist agitation, recognizing however that such a statement must at some level represent a weathervane of considerable public sentiment, something along the lines of Nikita Khrushchev’s “we will bury you” speech at the Kremlin in 1956.
As a made my usual round of blogs, major networks and syndicated news sites, an article popped up on my radar alleging that Italian police captured two unidentified Japanese men trying to illegally cross the border from Italy into Switzerland-carrying $134.5 billion dollars in US government bonds in a false-bottomed briefcase. At first, I chuckled at what had to be the boldest counterfeiting attempt of the century. Then my spider-sense started tingling.
The securities were divided among 249 certificates of 500 million each, along with ten other certificates each worth $1 billion respectively. The men captured were not named, nor to this date have they been charged with any crime. With the exception of two articles roughly three paragraphs long on Bloomberg.com, which at no point in time appeared on the main page and had to be dredged up via a keyword search, a follow-up search on Google, Bing and Yahoo! reveal an almost complete media blackout of what is at the very least, the most elaborate counterfeiting attempt we have ever seen in a generation, and at the worst, a sinister omen for the future of American debt.
There were no headlines on CNBC, MSNBC, CNN, the BBC, FOX business news, or any other western media network, whereas the article is already spreading like wildfire through the Italian, Swiss and Asian news networks. The articles first began appearing on June 11, exactly one day before Yosano began singing the praises of US Treasuries.
These denominations are strictly for government-to-government transactions and are not found in the private sector. The 16 primary dealers who make a market for US government debt are the only private sector organizations even remotely likely to have access to bonds of that size in paper or bearer form. However, the auction process is entirely electronic and has been so for decades ever since the Depository Trust and Clearing Corporation was established. This would suggest that these bonds, if real, belonged to a Central Bank.
As for forgery, any potential buyer who would be interested in buying government bonds in that denomination would not only have the technology sophisticated enough to authenticate then within seconds, but would need to have the financial networks and the banking infrastructure to make the transition from bearer bond form to transferable accounts, or cash. As such, it would be extremely difficult for a forger to make a successful market in denominations typically exclusive to central bank transactions because of the eyebrows it would raise. This is why art forgers generally try to avoid replicating Rembrandt and other high-profile old Masters. The values are so high, and the market so thin, that the white-hot intensity of the screening process would immediately expose all but the very best counterfeiters. As such, when such forgeries do occur at that level, they are almost never sold directly to auction houses. A forger must provide not only certificates of authenticity, but proof of fire and theft insurance with a major art insurer.
The identities of the men captured have been withheld, and as of this writing (pending further developments) there is nothing to indicate that they have been formally charged with a crime. The men captured are being treated with the courtesy normally provided to government agents. Colonel Mecarelli of the Guardia di Finanza in Italy said that he asked the SEC to verify the bonds authenticity, and that he expects a reply “within a few days” according to the Bloomberg article which can be read in its entirety here:
And then we have the suspicious comments uttered the following day by Yosano which were widely disseminated throughout the news media - with no immediate reference to what I have decided to refer to as the ‘Italian Incident’. The $134.5 billion in US government bonds would have represented roughly a third of the Japanese’ debt holdings. As such, any attempt to liquidate them openly would have resulted in a panic- and a potential collapse of the Treasury market.
The evidence as of this writing strongly suggests that a major Central Bank, most likely the Japanese, attempted to liquidate $134.5 billion dollars in US government debt on the black market, at what would have to be a deep discount. The ‘Italian Incident’ is perhaps the biggest news story never to hit the front page.
Assuming this is in fact the case, it means that the market for Treasuries is inefficient. Vital price signals that would have been sent through an open liquidation have been suppressed due to parallel market activity. These and other concerns have led to the increased popularity of TBT and ETFs that attempt to replicate the inverse performance of dollar and Treasury bond indices. I am not a fan of leveraged ETFS for reasons other than intra-day trading, but would strongly encourage investors to find ways both transparent and liquid to hedge their overall dollar exposures.