Aussie Bond Surge at Odds With Japan Rout as Central Banks Reign

Central Bank Action Weigh on Aussie and Japanese Bonds
  • Australian bond yields tumble to records as RBA cuts rates
  • Japan government securities head for biggest loss since 2013

Japanese bonds are plunging. Australia’s surged to a record. Blame it all on central banks.

Benchmark sovereign notes in Japan headed for their biggest loss in three years on speculation the central bank will amend its unprecedented debt-purchase plan as soon as September. Australian yields tumbled to levels never seen before as the Reserve Bank cut interest rates in response to inflation running below its target.

The divergence highlights the potency central banks have over their bond markets, even when analysts are questioning the limits of monetary policy. The Reserve Bank of Australia, with a benchmark of 1.5 percent, still has room to cut. Pacific Investment Management Co. said the Bank of Japan -- which is buying 80 trillion yen ($780 billion) a year of bonds and uses negative interest rates -- has pushed policy as far as it can.

“The financial markets are being driven by what the central banks are doing,” said Roger Bridges, the chief global strategist for interest rates and currencies at Nikko Asset Management Co.’s Australian unit in Sydney, which has $14 billion in assets. “The central bank here has room to cut if necessary. In Japan, the policy options are deemed to be running out.”

Japan’s 10-year yield rose 8 1/2 basis points to minus 0.06 percent as of 8:23 a.m. in London. It has spiked 23 1/2 basis points since July 27, heading for the steepest four-day increase since May 2013.

Australia’s 10-year rate fell as low as 1.81 percent. The extra yield the bonds pay over similar-maturity Treasuries shrank to 29 basis points, the narrowest since 2001, based on closing levels.

Japanese policy makers fueled speculation they’re running out of options when they finished a meeting last week and opted against extending their two main tools, the bond purchases and negative interest rates, even as the inflation rate falls further below zero. They also announced a review of the effectiveness of the central bank’s policies.

For more on Pimco’s view on Japan bonds and the BOJ, click here.

“We have probably seen the low of the yield of the super long JGBs,” Tomoya Masanao, Pimco’s head of portfolio management in Japan, wrote in an e-mail Monday. “The BOJ hit its limit,” he wrote in a report on the company’s website last week.

In Australia, traders are betting on another rate cut by the end of this year, swaps markets indicate. Meanwhile, JPMorgan Chase & Co., Morgan Stanley and Macquarie Bank Ltd. all said before this week’s easing they anticipated the RBA will need to cut the cash rate to 1 percent in the second quarter of next year.

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