BOJ Shrinking Market Blamed for Jump in Volatility: Japan CreditWes Goodman
The Bank of Japan, which got credit for driving benchmark bond yields to record lows, is taking its share of the blame for the biggest market swings in 17 months.
The 10-year Japanese government bond fell the most since May 2013 on Thursday and was rising today by the most since April 2013. Thirty-year yields climbed 18 1/2 basis points to 1.29 percent yesterday and retreated to 1.235 percent today. A measure of 60-day volatility for JGBs surged to its highest in 1 1/2 years, as the BOJ shrinks the market by buying as much as 12 trillion yen ($101.4 billion) of the debt every month.
“The BOJ is buying a lot of JGBs,” said Kazuaki Oh’e, a debt salesman at CIBC World Markets Japan Inc. in Tokyo. “There is very little liquidity. Prices go up and down so much. Investors don’t like such a market.”
The Bank of Japan refrained from adding to its record bond-buying program on Jan. 21, as global central banks compete to lower interest rates, weaken currencies and push investors into riskier securities. The central bank’s own data show it held 22.9 percent of government debt as of Sept. 30. Sovereign securities slid yesterday after demand at a 20-year auction fell to its weakest level since November, amid concern over how the central bank will exit stimulus policies designed to achieve 2 percent inflation.
“If you think consumer prices will be reaching 2 percent, yields on the longer end are way too low,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. “The current bond market is just driven by supply-demand imbalance.”
Japan’s 10-year JGB yield dropped for the first time in four days after the European Central Bank said it will buy 60 billion euros ($68 billion) of assets a month as part of a quantitative-easing program. ECB President Mario Draghi pledged to keep spending until there’s a “sustained adjustment in the path of inflation.”
The yield on the 10-year bond fell 7 1/2 basis points to 0.235 percent as of 1:43 p.m. in Tokyo, after climbing 6 1/2 basis points yesterday, according to Japan Bond Trading Co., the nation’s largest inter-dealer debt broker. The interest rate fell to a record 0.195 percent on Jan. 20. A basis point is 0.01 percentage point.
“Japan’s government bond market is responding favorably to the larger-than-anticipated scale of ECB’s sovereign quantitative easing,” said Souichi Takeyama, a rate strategist at SMBC Nikko Securities Inc. in Tokyo. “Given the sell-off in bonds we saw yesterday, we’re seeing a rebound.”
Bond-market yields suggest inflation will average 0.77 percent over the next decade, short of the BOJ’s target. The central bank cut its inflation projection to 1 percent for the fiscal year starting April 1 at a policy meeting this week.
Japan’s benchmark inflation gauge, the consumer price index excluding fresh food costs, has averaged 0.1 percent for the past two decades.
“Everyone had the impression that yields were at problematic levels,” said Kazuto Doi, a Tokyo-based fund manager at Western Asset Management Co. “In that sense, it’s a good movement, but at the same time I don’t expect too much of an upward swing in yields. But this is a big swing for the JGB market.”