BOJ Capping Bond Yields Means Quiet Debut for Volatility Index

  • Bets on higher volatility `not a wise trade': JPMorgan AM
  • Implied price swings approaching lowest level since April

Investors have a new gauge of volatility in the $8.3 trillion Japanese government bond market. It may be a long time before it springs to life.

S&P Dow Jones Indices developed the S&P/JPX JGB VIX using the Chicago Board of Exchange’s VIX methodology, designed to capture prospective swings in the market 30 days in advance by comparing option prices, Yoshiyuki Makino, the Tokyo-based head of the index provider’s Japan office, said in an interview Thursday before an official announcement scheduled for Oct. 15. The measure dropped to the lowest since April as the Bank of Japan purchases as much as 12 trillion yen ($100 billion) of JGBs per month -- enough to buy every new bond the government issues.

“We’re unlikely to see any jump in volatility or in yields for the foreseeable future, and betting on that right now isn’t a wise trade,” said Genji Tsukatani, a fund manager in Tokyo at JPMorgan Asset Management Inc., which has about $1.8 trillion in assets. “Any increase in volatility would come only if there are concerns that bonds have become too expensive, like the benchmark yield falling below 0.2 percent.”

Ten-year JGB yields were 0.32 percent on Tuesday in Tokyo, down from as high as 0.545 percent in June. The BOJ’s unprecedented stimulus helped push them to a record low of 0.195 percent in January, when yields on securities with maturities as long as five years turned negative for the first time.

BOJ Outlook

More economists see the central bank expanding stimulus as soon as its next policy board meeting on Oct. 30 to recharge its effort to produce stable 2 percent inflation by or around September 2016. Its preferred measure of consumer prices turned negative in August for the first time since April 2013, when Governor Haruhiko Kuroda initiated his quantitative and qualitative easing program.

While driving down yields, monetary easing has also sapped market liquidity. Two-year bonds, which yield 0.005 percent, failed to trade Friday after changing hands on Thursday for the first time during the week.

The volume of 10-year JGB futures on the Tokyo Stock Exchange dropped 17 percent in September from a year earlier, according to Japan Exchange Group Inc. data. Trading in options on those contracts slid 28 percent over the same period.

The JGB VIX decreased to 2.12 percent on Friday, the lowest since April 22. It surged to near 4 percent in May and June. The lowest it has been is 1.46 percent in August of last year, based on data running to the start of 2008. Financial markets in Japan were closed on Monday for a public holiday.

Market ‘Signpost’

“Volatility options are there to hedge any future moves in the yield, so the fact that they’ve been declining shows that QQE really has a strong impact on capping yields and lowering volatility,” said Yusuke Ikawa, a UBS Group AG strategist in Tokyo. “When it gets below 2 percent, that’s when it feels low.”

While an exit from QQE may be a long way off, Makino of S&P Dow Jones Indices says the timing is just right for the JGB VIX, with investors hungry for something they can use as a “signpost” to catch changes in the market’s direction early.

“Investors are focused on when and how the central bank’s almost single-handed buying-up of the market will change,” he said. “Bringing out the index once volatility has started to rise will be too late. Bringing it out now, while it remains low, means we can see that change just in time.”

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