Greece Challenged by JGBs for Most-Volatile Bonds

Japanese PM Shinzo Abe
Japanese Prime Minister Shinzo Abe, who had called on the Bank of Japan to offer “unlimited” stimulus to end deflation, said yesterday that close attention needs to be paid to the bond market. Photographer: Kenichiro Seki/Pool via Bloomberg

Bank of Japan Governor Haruhiko Kuroda’s unprecedented stimulus has made his nation’s bonds the world’s most-volatile sovereign debt after Greece’s.

Historical price volatility of Japanese government bonds maturing in more than 10 years has jumped 14.8 percentage points this year to 17.6 percent on a 10-day reading, the second highest among the 25 sovereign markets tracked by the European Federation of Financial Analysts Societies and Bloomberg. Swings for Greek bonds fell 15.9 points to 20.4 percent. By comparison, JGBs were the least volatile globally at the end of 2011.

Japan’s 10-year yields touched a record low of 0.315 percent on April 5 and then surged to almost double that level in the same session, a day after Kuroda increased bond purchases by more than expected. Prime Minister Shinzo Abe, who had called on the BOJ to offer “unlimited” stimulus to end deflation, said yesterday that close attention needs to be paid to the bond market. Japan has the world’s heaviest debt load relative to its economic output, followed by Greece.

“Investors have yet to determine where yields should stand considering the declines in yields reduce the attractiveness of JGBs as investments,” 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. “I don’t think investors should take more unnecessary risks in government bonds, especially given that volatility is rising.”

Circuit Breaker

Japan’s 10-year bond futures tumbled on April 5, prompting the Tokyo Stock Exchange to issue a circuit breaker twice to stem the movement. The bourse halted trade once on April 8 when the contracts soared.

The yield on the benchmark 10-year bond has climbed 14 basis points in the past three days to 0.6 percent today. The 20-year rate has soared 22 1/2 basis points in the same period to 1.36 percent after last week touching an almost decade low of 0.845 percent. A basis point is 0.01 percentage point.

Kyle Bass, whose Dallas-based hedge-fund firm Hayman Advisors LP made $500 million in 2007 betting against U.S. subprime mortgages, said JGB holders’ reaction to the BOJ stimulus may foreshadow a broader selloff.

“This is the first deviation of the sanctity of that marketplace,” Bass, who has been betting on a collapse in the Japanese bond market for at least three years, said in an interview yesterday on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle. “Investors in JGBs panicked. And what’s fascinating to me is they just told you, ‘Don’t worry, we’ve got this.’”

Corporate Bonds

Elsewhere in domestic credit markets, Shinko Electric Industries Co., a Nagano, Japan-based electronics material manufacturer, registered to sell as much as 50 billion yen ($505 million) of bonds, according to a filing with the Ministry of Finance.

Japan’s corporate notes have handed investors 0.9 percent this year, compared with a 2.67 percent return on the nation’s sovereign debt, according to Bank of America Merrill Lynch index data. Company bonds worldwide have gained 1.24 percent.

The yen traded at 99.10 per dollar at 3:34 p.m. in Tokyo, after yesterday falling to 99.66, the weakest since May 2009. It has plunged more than 22 percent in the past six months, the worst performance among the 10 developed-market currencies tracked by the Bloomberg Correlation Weighted Indexes.

Swings in the Japanese currency have also increased, with the dollar-yen’s one month implied volatility touching 14.5 percent yesterday, the highest since March 2011.

‘Improve Stability’

Abe said yesterday large-scale government bond purchases by the central bank could have a substantial effect on the market and that he expects Kuroda to “improve stability through close communication.” The BOJ said in a statement yesterday it will hold a meeting with about 40 market participants tomorrow.

The BOJ governor and his fellow board members introduced what it called “quantitative and qualitative” monetary easing on April 4, under which the central bank will aim to double the monetary base in two years and lengthen the average maturity of bonds that it buys by twofold.

The BOJ will buy 7.5 trillion yen of bonds a month, exceeding the 5.2 trillion yen estimated by economists in a Bloomberg News survey before last week’s meeting. More than half of the purchases this month and next will be allocated to debt maturing in more than five years. Buying plans from June onwards will be announced each time they are decided, the central bank said in a statement.

Potential Losses

A wider fluctuation of bond yields exposes JGB holders to potentially bigger losses. A money manager who invests $10 million in Japan’s 30-year debt would lose about $2.09 million should its yield rise by 1 percentage point, according to Bloomberg data on so-called duration.

“Japan’s bonds have become a high-risk, low-return investment,” said Toru Yamamoto, the Tokyo-based chief strategist at Daiwa Securities Co., the nation’s second-biggest brokerage. “What the BOJ intends to do is chase commercial lenders out of the bond market and get them to extend lending.”

Banks owned about a third of the nation’s outstanding debt at the end of last year, making them the biggest creditor to Japan, BOJ data show.

The Ministry of Finance is scheduled to sell 30-year bonds tomorrow and 20-year debt on April 18. The March 8 offering of the longer-dated securities drew bids of 3.33 times the amount on offer, the lowest demand since June. The future auctions will probably have “bad” results, said Teruyoshi Sotome, a Tokyo-based senior bond strategist at Mizuho Securities Co.

‘Serious’ BOJ

“Investors at first saw how frightening the BOJ could be once it got serious and expected an explosive impact on the market, but their buying didn’t follow through,” said Sotome. “Buying bonds at these low rates poses the risk of fixing low returns.”

The cost to protect Japan’s sovereign notes for five years against nonpayment fell to 73 basis points yesterday, after reaching 78 last week, the highest since Jan. 23, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. It means investors have to pay $73,000 to insure $10 million of the bonds.

The ratio of Japan’s debt to gross domestic product is estimated to reach 245 percent this year, the highest globally and compared with Greece’s 181 percent, data from the International Monetary Fund show.

“There are no willing buyers in Japan’s bond market except for the BOJ,” said Manabu Tamaru, a fund manager in Tokyo at Baring Asset Management, which manages $53 billion in assets globally. “JGBs are not risk-free assets but rather return-free assets.”

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