Japan’s Bonds Halt Worst Drop in Decade After BOJ Adds Funding

Japanese government bonds halted the biggest slide in almost a decade after the central bank announced a 2.8 trillion yen ($27 billion) infusion of funds.

The yield on the five-year note earlier reached 0.455 percent, the most since May 2011. JGBs have plunged in the past three days as an advance in global shares and U.S. bond yields sapped demand for debt with yields still among the lowest in the world. The Bank of Japan supplied an extra 2 trillion yen in one-year funds today, the first of such size since April, in addition to a regular injection of 800 billion yen.

“The BOJ’s one-year supply operation is designed to calm the bond market, targeting middle-term securities that have been sold off the most,” said Toshiaki Terada, a researcher at Totan Research Co., a money-market brokerage in Tokyo. “The operations in April had a reasonable impact on the market.”

Five-year yields added one basis point, or 0.01 percentage point, to 0.41 percent as of 3:02 p.m. in Tokyo. The benchmark 10-year rate was up 1 1/2 basis point to 0.86 percent after earlier reaching 0.92 percent, highest since April 2012.

The 10-year rate soared 25.5 basis points from May 10 to yesterday, marking the biggest three-day surge since August 2003. Today’s operation was aimed at responding to the rapid increase in interest rates, according to the BOJ’s market operations division.

JGB Losses

“I don’t think the BOJ expected bond yields to rise to these levels,” said Makoto Suzuki, a senior bond strategist at Okasan Securities Co. in Tokyo, one of the 24 primary dealers obliged to bid at government debt sales. “There will possibly be bad effects on the economy from gains in bond yields, so the BOJ may be showing its stance toward such market moves with its supply of funds.”

JGBs initially surged after BOJ Governor Haruhiko Kuroda announced on April 4 that the central bank would double bond purchases in an effort to end deflation. The 10-year yield plunged to a record low of 0.315 the following day.

Japanese government debt lost 3.1 percent through yesterday since the BOJ’s stimulus announcement last month, according to a Bank of America Merrill Lynch index. In dollar terms, JGBs slumped 8.5 percent, reflecting the yen’s depreciation.

The Topix Index of shares jumped 1.8 percent today to the highest since August 2008. Ten-year U.S. Treasury yields reached 1.985 percent yesterday, the highest since March 15.

Japan has the largest debt burden in the world, making its fiscal health vulnerable to rising interest rates. The nation’s liabilities will probably balloon to 245 percent of economic output this year, according to the International Monetary Fund’s estimate. The debt totaled 991.6 trillion yen at the end of March, a 0.6 percent decrease from the end of December, according to a Ministry of Finance statement on May 10.

To contact the reporters on this story: Saburo Funabiki in Tokyo at sfunabiki@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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