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Japan Bond’s Late Trading Open Risks Alienating Investors

For a fourth day, the benchmark note in Japan’s $9.6 trillion bond market opened late.

The 10-year bond began changing hands at 10:30 a.m. in Tokyo today, almost two hours after the usual open, according to Japan Bond Trading Co., the country’s largest inter-dealer debt broker. The security didn’t trade until the afternoon in Tokyo for the previous two days and the first transaction on June 9 was after 10 a.m. There was no trading at all on April 14, the first time that happened since 2000.

Liquidity is drying up in the world’s biggest debt market after the U.S. as the Bank of Japan buys bonds to pump money into the economy. The central bank purchases some 7 trillion yen of debt ($69 billion) a month, equivalent to about 70 percent of the nation’s sales of coupon-bearing debt. The danger is investors will look elsewhere for bonds at a time when BOJ Governor Haruhiko Kuroda is trying to keep borrowing costs down.

“People are avoiding trading,” said Yoshiyuki Suzuki, the head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $59.2 billion in assets. “If we want to purchase a big amount, the auction is our only chance. If we want to sell, we can only do it when the BOJ is purchasing. We sell to the dealer, and the dealer sells to the BOJ.”

Europe, Treasuries

Suzuki said he is investing in European bonds and Treasuries as he seeks markets where he can buy and sell at will.

In Japan, a trade for Suzuki’s company would usually be more than 10 billion yen face value of government debt, enough these days to move prices against him.

“If I say I want to sell 50 billion yen, the market will fall,” Suzuki said. “In the U.S. Treasury market, this amount will not crash the market.”

Japan’s benchmark 10-year yield declined 1/2 basis point today to 0.595 percent as of 5 p.m. in Tokyo. The price of the 0.6 percent security due in June 2024 rose to 100.047 yen from 99.999 yen. The yield has been in a range of 0.56 percent to 0.65 percent for three months.

Gundlach Avoiding

Japan is “the best example” of a government debt market dominated by the central bank, according to Jeffrey Gundlach, the chief executive officer of DoubleLine Capital LP, which manages more than $47 billion.

“They have that 10-year bond yield absolutely pegged at 60 basis points,” he said last month in an interview at Bloomberg’s headquarters in New York. “It hardly ever changes. I don’t even look at it anymore.”

With the U.S. 10-year at 2.65 percent, Treasuries yield 2.06 percentage points more than their Japanese counterparts. The spread between the two has averaged 2.02 percentage points during the past year.

While Japan’s central bank scoops up bonds, the Federal Reserve is tapering the monthly debt purchases it has used to support the U.S. economy. Both central banks are keeping their main interest rates near zero to fuel growth.

“I don’t see much complaining about liquidity in Treasuries,” said Kazuaki Oh’e, a debt salesman at CIBC World Markets Japan Inc. in Tokyo. “The Fed has started tapering, unlike the BOJ. Traders or dealers need liquidity. Otherwise they don’t participate.”

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