Volatility Tumbles in U.S., Japan Bonds on Kuroda Curve Control

  • Japan bond futures VIX drops most since 2008 after BOJ tweak
  • Goldman Sachs Asset sees low JGB volatilty spreading globally

The Bank of Japan’s decision to focus on targeting yields across the curve, rather than just on buying 80 trillion yen ($793 billion) a year of government securities, is spurring traders to bet volatility will evaporate in the world’s biggest bond markets.

The S&P/JPX JGB VIX, a gauge of implied volatility for 10-year Japanese government bond futures, dropped by 1.7 percentage points last week to stand at 1.95 percent on Friday, the lowest level since January. It tumbled 1.17 points on Wednesday, the biggest decline since December 2008, after the BOJ said it would aim to keep the 10-year Japanese yield near zero. Traders also cut expectations for price swings in U.S. debt, sending the the CBOE/CBOT 10-year U.S. Treasury Note Volatility Index to a two-year low of 4.40 percent on Thursday.

“We expect the BOJ’s efforts to maintain a stable 10-year yield will reduce global rate volatility, as changes in the JGB market have been a key driver of global rates this year,” Goldman Sachs Asset Management said in a note e-mailed to clients Friday.

Japanese bonds had led a global debt rout prior to the BOJ announcement amid speculation the nation’s central bank wanted to increase the gap between short- and long-term yields, known as a steepening of the yield curve. Governor Haruhiko Kuroda has been at the vanguard of global policy makers’ efforts to revive inflation and support growth by deploying extraordinary monetary stimulus. They’ve waded into financial markets, raising the risk of unintended consequences. He acknowledged this month that low longer-term yields choke profits for lenders and hurt returns on pension and insurance investments.

Goldman Sachs Asset said it had removed bets that longer-term yields would rise relative to shorter-term yields after the curve steepened in the leadup to the BOJ decision.

For a Quicktake Q&A on the BOJ and the Yield Curve, click here

Japan’s curve has flattened in the wake of the central bank’s announcement, with the gap between two- and thirty-year yields shrinking to 72 basis points on Monday in Tokyo from 84 on Sept. 14.

“The BOJ’s yield curve control is expected to cut market volatility significantly, reducing risk premiums on debt, especially for longer maturities,” Kazuhiko Sano, chief bond strategist at Tokai Tokyo Securities Co. in Tokyo said in a note Monday. “That will prompt investors to buy bonds with positive yields, contributing to a flattening of the yield curve.”

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