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Japan’s Bond Market Wants BOJ to Purchase More Short-Term

BOJ Seen Failing to Tame Volatility as Sale Slumps
A pedestrian walks past the Bank of Japan headquarters in Tokyo. Japan’s benchmark 10-year yield jumped to 1 percent last week, a one-year high, even after the BOJ doubled bond purchases in April to end 15 years of deflation in the world’s third-largest economy. Photographer: Kiyoshi Ota/Bloomberg

Expectations for the widest bond price swings in more than four years and the weakest demand at an auction in nine months added to signs of waning debt market confidence in Bank of Japan Governor Haruhiko Kuroda.

Implied volatility of Japan’s 10-year note futures, a measure of expected moves used to price options, climbed to 7.23 percent yesterday, the highest since November 2008, according to data compiled by Bloomberg. A sale of 20-year debt yesterday drew the lowest demand since August 2012. Expected price fluctuations for U.S. Treasury futures rose to 5.06 percent from 3.61 percent on April 30.

“Confidence in the BOJ’s monetary policy is starting to be shaken,” said Toru Suehiro, a market economist in Tokyo at Mizuho Securities Co., one of the 24 primary dealers obliged to bid at government debt auctions. “Doubt is the biggest enemy for monetary policy.”

Japan’s benchmark 10-year yield jumped to 1 percent last week, a one-year high, even after the BOJ doubled bond purchases in April to end 15 years of deflation in the world’s third-largest economy. While Kuroda indicated this week that the financial system can weather an increase in yields if it occurs alongside an economic recovery, mortgage and corporate borrowing rates have started climbing as consumer prices continue to fall.

Yields Jump

Ten-year Japanese government bond yields rose three basis points to 0.935 percent today after jumping 7 1/2 basis points yesterday. They stood at 0.55 percent on April 3, the day before the BOJ unveiled a plan to buy more than 7 trillion yen ($69 billion) of bonds every month, about half the amount that Japan plans to sell in the market in the fiscal year started April. The policy aims to double cash in the economy in two years.

BOJ policy board member Ryuzo Miyao said yesterday that the central bank’s debt purchases will “strongly support” growth by keeping interest rates lower even when improved economic prospects put upward pressure on borrowing costs.

So far, policy makers are getting the opposite results. As JGB yields climbed, the benchmark lending rate for large corporations, known as the prime rate, rose 10 basis points from its record low to 1.25 percent on May 10, according to Mizuho Corporate Bank Ltd. Rates for 35-year home loans inched higher to 1.81 percent this month from an all-time low of 1.8 percent in April, data from the Japan Housing Finance Agency show.

Corporate Bonds

Elsewhere in Japan’s credit markets, Asahi Glass Co. sold 20 billion yen of 10-year, 1.005 percent bonds, according to a statement yesterday from Nomura Holdings Inc. The Tokyo-based company offered similar-maturity debt in 2009 that paid 1.943 percent, according to data compiled by Bloomberg.

Japan’s corporate notes have handed investors a 0.47 percent loss this month, poised for the worst performance since March 2011, Bank of America Merrill Lynch data show. That compared with a 1.64 percent decline for the nation’s sovereign debt, and a 1.15 percent loss for company bonds worldwide.

Five-year credit-default swaps to insure Japan’s sovereign notes were at 71 basis points yesterday, after rising to 74 on May 27, the highest since April 3, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. An increase in the contracts signals worsening perceptions of creditworthiness, while a decrease suggests the opposite.

The Markit iTraxx Japan index, comprised of default swaps for 50 companies, was at 88.5 basis points yesterday after increasing to 93 on the previous day, the highest since April 22, CMA data show. A basis point is 0.01 percentage point.

Bond Auction

The yen rose 0.3 percent to 102.08 per dollar as of 3:37 p.m. in Tokyo today. It has tumbled 12 percent this year, the most among the 10 developed-market currencies tracked by the Bloomberg Correlation Weighted Indexes.

The Ministry of Finance’s 1.1 trillion-yen offering of 20-year debt yesterday attracted bids valued at 2.54 times the amount available, down from 3.68 at the prior sale in April. Yields on the securities rose 3 1/2 basis points to 1.695 percent in the market yesterday.

“The 20-year auction came in weaker than I expected,” said Takuma Sugawara, a senior JGB strategist in Tokyo at Societe Generale SA, another primary dealer. “I think investors’ demand for the securities will start to pick up as yields move higher,” with buying interest already seen when rates are around 1.7 percent, he said.

The ministry will auction 2.9 trillion yen of 2-year notes on May 30 and 2.4 trillion yen of 10-year debt on June 4.

Deflation Lingers

Government data due for release on May 31 may show that deflation persists in Japan, bolstering the allure of fixed-income securities. Consumer prices excluding fresh food fell 0.4 percent in Japan last month from a year earlier, according to the median estimate of economists surveyed by Bloomberg News. The rate hasn’t been above zero since April 2012.

Price swings have also increased in the share market.

One-month implied volatility of the Topix stock index jumped to 36.4 percent on May 24, the highest since the aftermath of Japan’s record earthquake in March 2011. The gauge closed 1.2 percent higher yesterday after swinging between a 1.2 percent drop and a 1.8 percent gain. The Topix rose 0.9 percent today.

“Even when stocks fall, bonds are more likely to be sold if volatility remains high in the debt market,” said Kazuya Ito, the head of fixed income in Tokyo at Daiwa SB Investments Ltd., which oversees the equivalent of $48 billion.

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