Kuroda Spurs Worst Long Bond Rout in a Year on BOJ Tweak

Japanese longer-term bonds headed for their worst day in one year after the central bank cut allocations for buying the debt. Ten-year notes gained after U.S. Treasuries climbed following the Federal Reserve meeting.

The Bank of Japan changed its monthly operations with JGBs to hold down the average maturities of securities bought as it scoops up about 7 trillion ($69 billion) a month of the debt to stimulate the economy. It divided purchases planned for June 23 of debt maturing in more than 10 years, allocating 30 billion yen for bonds due in more than 25 years and 100 billion yen for shorter-dated notes, according to a statement yesterday.

“The yield curve could steepen as the BOJ announced plans to buy fewer bonds maturing in 25 years or more,” said Shuichi Ohsaki, an interest-rate strategist in Tokyo at Bank of America Merrill Lynch, one of 23 primary dealers obliged to bid at government bond auctions.

BOJ Governor Haruhiko Kuroda’s unprecedented asset purchase program has threatened to paralyze his nation’s $9.6 trillion debt market, the world’s biggest after the U.S. Historical price volatility on Japanese bonds slid to a 1 1/2-year low this month and a lack of activity delayed trading in the benchmark 10-year note on at least four days last week.

The Ministry of Finance held its quarterly meetings on the bond market with investors today and will meet with primary dealers tomorrow.

Superlong Yields

Japan’s 30-year yield climbed as much as 6 basis points to 1.72 percent, the highest since June 11 and the biggest jump in a year, according to Japan Bond Trading Co. The yield was at 1.705 percent as of 4:05 p.m. in Tokyo.

The 40-year yield reached 1.8 percent, the highest since June 12, climbing the most this month. Its spread over the 10-year yield jumped to 121 basis points from 114.7 yesterday, the narrowest since May 1.

Barclays Plc recommended trades that profit when the yield spread between 10-year and 40-year securities widens.

Securities maturing in less than 25 years were supported after the Fed signaled interest rates are expected to stay low for a “considerable time” once it concludes monthly U.S. debt purchases, which were trimmed to $35 billion. The central bank left its target for overnight lending between banks in the range of zero to 0.25 percent, where it has been since 2008.

Japan’s 10-year yield slid a half basis point to 0.59 percent. The yield on equivalent U.S. Treasuries was little changed at 2.58 percent from yesterday, when it declined 7 basis points, the sharpest drop since May 28.

Yield Curve

“Yesterday’s change to the BOJ’s purchasing operations should be enough to change the dynamics of the yield curve,” Akito Fukunaga, director and chief rates strategist for Japan research at Barclays, another primary dealer, wrote in a note to clients today, adding that he expects that supply-demand conditions for the 30- to 40-year debt to deteriorate “substantially” over the short term.

The BOJ buys about 7 trillion yen of JGBs per month and set the average maturity of its purchases at about seven years. The central bank on June 13 kept a pledge to accumulate 50 trillion yen of bonds a year, equal to 42 percent of planned issuance for the fiscal year started April 1.

The central bank’s holdings swelled to 20.1 percent of outstanding JGBs in the first quarter, outstripping the 19.4 percent portion owned by insurance companies to make the BOJ the largest investor in the market for the first time in data going back to 1997, a report from the BOJ yesterday showed.

Market Inertia

Historical price volatility on Japanese bonds slid to a 1 1/2-year low of 0.888 percent on June 17 on a 60-day basis. Benchmark 10-year bonds failed to trade on April 14 for the first time since December 2000 and didn’t change hands during two morning sessions last week.

Kuroda reiterated in parliament today that, while he isn’t concerned that trading is drying up in the Japanese government bond market, the central bank will continue to watch developments in the market closely and take appropriate action to avoid problems.

JGB investors said the central bank’s debt purchases have suppressed trading volume and yields, a Ministry of Finance official said at a press briefing today.

A participant at today’s meeting said that even as inflation picks up, yields will remain stable as BOJ buying continues, according to the official. Some investors recommended increasing the issuance of inflation-linked bonds in the future based on demand, he said.