Japan's Yield Curve Faces Further Pounding Amid BOJ Aftershock

Japan’s sovereign bond yields slid to record lows across the curve amid the aftershock from the central bank’s unexpected move last week to adopt a negative interest-rate strategy.

Benchmarks 10-year yields touched 0.05 percent, 20-year yields reached an unprecedented 0.74 percent and two-year yields slid to a record minus 0.11 percent after the Bank of Japan on Friday unexpectedly cut the rate on excess reserves held by financial institutions at the central bank to minus 0.1 percent. Expectations for price swings for debt over a 60-day period soared on Friday to the highest since July.

“Volatility will remain high for the time being amid a search for where the appropriate levels area, but one thing is clear: the downtrend in yields strengthened further,” said Shuichi Ohsaki, the chief rates strategist at Bank of America Corp.’s Merrill Lynch unit in Tokyo. “Eventually, a sub-zero yield on 10-year bonds will come into sight.”

The yield on the 10-year bond dropped 3 1/2 basis points to 0.06 percent as of 10:20 a.m. in Tokyo from Friday, according to Japan Bond Trading Co., the nation’s largest inter-dealer debt broker. The 20-year yield fell six basis points to 0.75 percent, while the two-year yield slid three basis points to minus 0.11 percent.

Japan’s 30-year yields dropped 7 1/2 basis points to 0.99 percent, after touching 0.985 percent, the lowest since April 2013. A basis point is 0.01 percentage point.

Friday’s move to penalize a portion of banks’ reserves complemented the BOJ’s record asset-purchase program, including 80 trillion yen ($660 billion) a year in government-bond purchases, which was kept unchanged at the board meeting.

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