The contrast between the Bank of Japan’s reduction in longer-maturity bond purchases and the Ministry of Finance’s increased issuance is driving investors away from the super-long government debt.
The yield premium on the 30-year sovereign over the 10-year widened to 113 basis points yesterday, the most since March 2013, data compiled by Bloomberg show. That compares with a spread of 83 basis points in the U.S. (USGG30YR) and 97 in Germany. (GDBR30)
The BOJ’s decision to purchase more than three times the amount of shorter-dated notes over debt due in longer than 25 years on June 23 came days after the finance ministry proposal to lengthen maturities. While the central bank’s about 7 trillion yen ($69 billion) in monthly debt buying has made it the largest investor in the JGB market, policy makers insist they are not financing the nation’s debt.
“Conflicting messages from the Ministry of Finance and the BOJ may be a signal that a game of pass-the-hot-potato is about to start,” said Kazuto Doi, a Tokyo-based portfolio manager at Western Asset Management Co., whose company oversees $468.7 billion globally. “Investors will seek higher risk premiums for the back-end of the yield curve.”
The BOJ is reluctant to buy more super-long debt because its holdings are approaching its average-maturity limit. The MOF prefers to sell such debt to take advantage of falling rates.
The average maturity of its purchases was around 7.6 years in the 10 days through June 10, after rising to about 8.3 years in January, according to Katsutoshi Inadome, a fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. The BOJ targets a range of six to eight years.
The central bank on June 23 divided buying of JGBs maturing in more than 10 years for the first time, allocating 30 billion yen for bonds due in more than 25 years and 100 billion yen for shorter-dated notes. That came less than a month after it revised its guidance on the amount it will purchase for a third time since it began unprecedented easing.
Japan’s 10-year government bond yielded 0.58 percent as of 4:30 p.m. in Tokyo yesterday, the lowest globally. The yen traded at 102 against the dollar.
The 30-year yield was at 1.715 percent. It rose four basis points, or 0.04 percentage point, on June 19 after the BOJ announced operational changes the previous day, the biggest jump in more than a year on a closing basis.
The BOJ’s holdings swelled to 20.1 percent of outstanding sovereigns in the first quarter, making it the largest investor in the market for the first time in data going back to 1997.
The other unspoken reason why the BOJ doesn’t want to own too much longer maturity debt is because it doesn’t want to be exposed to excessive interest-rate risk, according to Western’s Doi. There are no guarantees price increases will stop at the BOJ’s target 2 percent, he said.
“The BOJ’s changes to its purchasing operation are purely technical,” said Hidenori Suezawa, a financial market and fiscal analyst at SMBC Nikko Securities Inc. “The average maturity of its bond holdings is in line with that of the debt issued and should not be recklessly changed.”
The government expects to increase the average maturity of bond issuance to 8 years and 5 months in the fiscal year started April 1, from 7 years and 11 months in the previous period by selling more 30-year debt and reducing sales of two- and one-year notes.
The ministry said on June 18 that because Japan’s debt burden is the highest among major economies, it should seek to stabilize the market by lengthening the maturity of its borrowing. The government should use a combination of methods, including more super-long issuance and offering fewer short-term notes, it said.
“The government is trying to sell as much in long-term notes as possible while yields are low, so the issuance of super-long debt is likely to increase next year,” said Akio Kato, the team leader of Japanese debt at Kokusai Asset Management Co. in Tokyo. The change in BOJ’s operations means “fewer chances for investors to resell super-long JGBs to the BOJ. The yield curve will steepen further.”
Investors who bought Japan’s 30-year securities yesterday and hold them for three months will get an annualized 2.24 percent return, less than the 2.92 percent for debt maturing in 20 years, data compiled by Bloomberg show. U.S. Treasuries maturing in 2044 are estimated to gain 4.2 percent.
“The BOJ has become such a big player that it’s killing liquidity in the market to a certain extent, so they need to act more cautiously,” said Satoshi Yamada, a manager of debt trading in Tokyo at Okasan Asset Management Co., which oversees the equivalent of $11 billion. “The timing of the operation change was a surprise. There’s fear and suspicion about what may happen next.”