Japanese Bond Selloff Pushes Yields Near Positive
Investors have been shedding Japanese government bonds since Friday’s central-bank disappointment
By RACHEL ROSENTHAL and HIROYUKI KACHI
Updated Aug. 2, 2016 10:02 a.m. ET
A selloff in Japan’s 10-year government bonds sent these negative-yielding assets within a hair of positive territory.
Yields on the benchmark 10-year Japanese government bond rose Tuesday as high as minus-0.025%—the highest level since March 16—compared with minus-0.145% Monday. They were around minus-0.06% late afternoon in Asia. Yields rise when bond prices fall.
The 0.2-percentage-point climb in yields over three sessions is the biggest move since May 2013, a month after Bank of Japan Gov. Haruhiko Kuroda introduced his first “bazooka” of monetary easing.
Japanese government-bond prices have been falling since Friday, when the central bank announced what amounted to modest policy tweaks—dashing expectations of an interest-rate cut further into negative territory and an expansion of asset purchases. The central bank’s easing program has fueled the fantastic run in bond prices since it started three years ago, so any hints the BOJ might be losing its punch has spooked bond investors.
Selling accelerated on Tuesday in the run-up to a government auction of 10-year bonds, and continued when results showed that demand remains weak.
Beyond the pervasive sense that the Bank of Japan’s monetary policy has reached its limit, the market was rattled by the central bank’s saying it plans a “comprehensive assessment” of policy in September. The rare bit of guidance has stirred questions among investors and analysts about what the BOJ—with a rich history of surprising markets—could be up to.
“What caught the market off-guard and was shocking for us was not that [the BOJ] would postpone additional easing, but rather that they are reviewing the structure of the current market,” says Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments in Tokyo, who manages ¥80 billion ($782 million) in assets. “That means that potentially [the BOJ] might tighten rather than ease, and that’s a source of confusion.”
What shape any tightening could take is anyone’s guess. One option, for example, would be adjusting its ¥80 trillion annual asset-purchase target to a range, and reducing its lower boundary to ¥60 trillion but raising its upper boundary to ¥100 trillion, says Shuichi Ohsaki, a rates strategist at Bank of America Merrill Lynch in Japan.
Limiting asset purchases would damp the appetites of investors who have been buying shorter-dated Japanese government bonds, despite their negative yields, with the expectation of selling them later to the BOJ at even higher prices.
 ENLARGE
The Bank of Japan’s Haruhiko Kuroda announced modest changes Friday. PHOTO:KAZUHIRO NOGI/AGENCE FRANCE-PRESSE/GETTY IMAGES
BOJ Gov. Haruhiko Kuroda suggested that market players are mistaken if they expect the comprehensive assessment to lead to tightening. “I don’t think it will produce such results,” he told reporters following a meeting with Finance Minister Taro Aso. “There is no change in our policy stance to push down the entire yield curve” to stimulate growth and generate 2% inflation.
On Tuesday, the market was particularly tense ahead of a Ministry of Finance auction of more than ¥2 trillion in 10-year bonds. Demand was weaker than usual, but some market participants were reassured when it emerged that big Japanese banks bought up large chunks of the issuance, a sign of confidence that prices would arrest their downward spiral.
Mitsubishi UFJ Morgan Stanley Securities was the biggest buyer, snatching up ¥585 billion—27% of the total issuance—according to Quick.
PineBridge’s Mr. Matsukawa said the rise in 10-year yields was an “opportunity to buy,” though he would be stepping in “cautiously.”
Despite the cloudy outlook, analysts say they are skeptical that selling will continue, given the BOJ’s commitment to easing.
“The negative-rates policy is under way,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management, adding that the 10-year yield should eventually go back to the minus-0.1% interest rate the BOJ introduced earlier this year.
Earlier Tuesday, Japanese Prime Minister Shinzo Abe ’s cabinet also approved a ¥28 trillion ($274 billion) stimulus package, a widely telegraphed action that analysts said had already been priced in by markets.
—Kosaku Narioka contributed to this article.
http://www.wsj.com/articles/japanese-bond-selloff-pushes-yields-near-positive-1470137561
|
