Japanese Bond Futures Fall as BOJ's Hayami Signals Higher Rates
By Martin Foster
Tokyo, April 13 (Bloomberg) -- Japanese bond futures and
short-term bonds fell, with two-year yields surging to their
highest levels in 14 months, after the Bank of Japan governor
hinted that interest rates may rise this year.
Futures for June delivery fell after BOJ Governor Masaru
Hayami signaled yesterday that the bank may raise interest rates
for the first time in a decade, making it less profitable to buy
bonds with borrowed money. That's especially true of bonds with
maturities not much longer than the overnight rates that tend to
react more sensitively to changes in interest rate forecasts.
``Rising two-year yields have already factored in a rise to
0.25 percent in the interbank overnight lending rate,' said
Yusaku Nozoe, an assistant manager at Societe Generale Securities
(North Pacific) Ltd.
Bond futures contracts for June delivery fell 0.50 to 131.02,
after touching lows of 130.86 in early trade and 130.83 in London
trading. The No. 221, 10-year benchmark bond rose 0.043, or 21.5
yen per 50,000 yen bond, to 100.729. The yield slipped half a
basis point to 1.815 percent, after earlier rising to 1.835
percent.
Yields on the two-year bond rose to 0.540 percent at one
point this morning, compared to a 0.420 percent close yesterday,
and was the highest since Feb. 8 last year. Yields on the five-
year bond rose to 1.24 percent, the highest level since March 28.
Still, some traders say the market may be too pessimistic
following the Hayami comments.
Not a Higher Rate Cycle
Traders focused on Hayami's comments that ``ending zero rates
doesn't mean tightening policy' and that their levels will only
rise as the economy recovers.
``Hayami's comments seem to suggest that the end of zero-rate
policy does not necessarily mean the beginning of a tightening
cycle,' said Michael Wilkins, manager of cross-market dealing at
Credit Lyonnais Securities. ``There's a huge difference between
these two things.'
The central bank has said before that the zero-rate policy is
abnormal, suggesting it has been looking to end it for some time.
Most analysts say they will allow the overnight interbank rate to
rise to around 0.25 percent and some to only 0.15 percent.
Declines in bonds were also limited as some investors said
bond yields were approaching attractive levels. The 10-year yield
is now at its the highest level since the 1.87 percent of March
30, and near the 1.90 percent level of March 28.
Masuhisa Kobayashi, a fixed-income strategist at Merrill
Lynch Japan Inc., sees 1.9 percent yields as a good level to pick
up bargains on the 10-year bond, and has not changed his call for
yields on the benchmark bond to fall to 1.5 percent in the first
quarter of the fiscal year from April 1 to June 30.
Consumption Lags
While Hayami's comments were taken by some investors as an
indication that rates will rise this year, the economy may be too
fragile to sustain a rate increase, said analysts.
``I feel the BOJ's pain, and realize that in theory they
should raise rates, to help push along the process of structural
reform' said Merrill's Kobayashi. ``But they won't be able to
because of poor consumption.'
Kobayashi points to the weak outlook for consumption, as
trade unions were forced to accept low increases in base pay from
April this year. ``Did you see the pitiful rises in wages this
year? They are the worst since the war,' he said.
Wage increases won by labor unions in major industries during
this year's annual spring wage negotiations are expected to mark a
record low for a third-straight year, falling below the 2.21
percent in fiscal 1999, as Japanese companies are offering workers
some of the skimpiest pay raises ever, saying they can't afford to
pay much more while profits remain low.
That will make workers more reluctant to spend.
Consumption makes up 60 percent of gross domestic product,
outweighing the 15 percent share of capital expenditure, which has
shown signs of improvement.
A change in the zero interest-rate policy this summer would
raise the costs banks have to pay when borrowing at the overnight
interbank call rate. That theoretically makes it less profitable
to buy bonds with borrowed funds.
Still, the key interbank overnight rate has stayed largely
unchanged around 0.02 percent, and while bond yields soared
earlier on the prospect of higher rates. That has actually worked
to broaden the margins available by borrowing at the overnight
bank rate and investing in 10-year bonds.
After the 10-year yield rose to 1.835 percent, it stood 181.5
basis points higher than the overnight lending rate in late trade
yesterday, higher than the 173 basis points available on Tuesday. |
