Battleground Shifts to 20-Year Japan Bond as Liquidity EbbsBy , , and
Superlong JGB volumes exceed benchmark notes by most on record
Analysts say trend to continue if 10-year yield stays negative
Japan’s benchmark 10-year bonds are no longer the most liquid part of the world’s second-largest debt market.
Distortions caused by the Bank of Japan’s unprecedented stimulus saw trading volume in bonds maturing in 20 years or more top 2026 notes by more than a trillion yen ($9.8 billion) in July, according to Bloomberg calculations based on the latest figures available from the Japan Securities Dealers Association. That’s the most in data going back to April 2004. Liquidity in superlong bonds exceeded the benchmark security for the first time in February, when the central bank’s newly introduced negative interest-rate policy drove 10-year yields to record lows below zero.
The BOJ is conducting a review of its bond-buying stimulus measures to coincide with a policy meeting next week, with Governor Haruhiko Kuroda acknowledging this month that low long-term yields hurt returns on pension and insurance investments. Japan Post Bank Co., the biggest holder of JGBs outside the BOJ, said last month it won’t buy notes with negative yields.
“The 20-year bond has become the new battleground for government debt trading,” said Katsutoshi Inadome, a senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “Unless the 10-year yield turns positive again, it’ll be difficult for the market to go back to the way it was before.”
Ten-year notes were the most liquid part of the market in January, but yields have now languished below zero for more than six months. They were at minus 0.035 percent on Thursday in Tokyo, after reaching a record-low minus 0.3 percent in July. The 20-year bond yield also dipped into negative that month, and has since risen to 0.455 percent.
Domestic investors have been forced into longer tenors as they scraped for returns in a market where 70 percent of yields are below zero.
Investors told Ministry of Finance officials at a regular meeting this month that they would like to see an increase in the issuance of 20-year and 30-year bonds. They also said that while yields had risen somewhat, they were not high enough.
The monetary authority, which meets on Sept. 20-21, is considering either a tweak to or an abandonment of its guidance on the range of government bonds that it buys, according to people familiar with the discussions. Any shift would reflect a desire by policy makers to give themselves greater flexibility as they continue with the unprecedented scale of debt purchases, the people said, asking not to be named as the talks are private. The Nikkei newspaper reported on Wednesday that the BOJ will explore delving deeper into negative rates.
Just over half of economists surveyed by Bloomberg forecast an expansion of monetary stimulus next week, while others point to November, December and next year. A small minority still expect no change in the foreseeable future.
Lenders traditionally profit from borrowing short-term funds and making longer-maturity loans at higher interest rates. The yield premium offered by 30-year bonds over two-year notes narrowed to a record in June.
Trading in superlong bonds totaled 4.5 trillion yen in July, about a third of overall volume, compared with 3.5 trillion yen for 10-year notes. Total trading of 14.1 trillion yen was near the record low reached in May. As long ago as March of last year, the central bank’s own research suggested quantitative easing was sapping liquidity.
“Five- to 10-year bonds make up 60 or 70 percent of the BOJ’s holdings, so in comparison, there are less liquidity issues with superlong bonds,” said Shuichi Ohsaki, the chief rates strategist at Bank of America Corp.’s Merrill Lynch unit in Tokyo. “As long as 10-year bond yields remain negative, trading in superlong bonds will continue to become more and more active.”