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Bank of Japan triggers blowout in bond yields By Tony Boyd, Global Markets Editor A global bond market rout which started in Japan and has spread to capital markets in the United States and Europe. Analysts have warned of a fundamental shift in world capital flows which may hit Wall St and weaken the already vulnerable euro because of soaring bond yields in Japan. The plunge in the US bond market flowed into European markets where German bond prices slumped and yields rose by 80 basis points. The sell-off in Europe continued in early trading last night. In Australia, several fixed-interest analysts have called the end of the bull run in Australian bonds and predicted a further blowout in yields despite strong economic growth and low inflation. The rout in the Australian bond market came as bond investors in Japan reacted negatively to moves by the Bank of Japan to stabilise bond prices and restore confidence in its financial management. The BoJ, which is under intense pressure from the US to underwrite government bond issues, gave the markets a nasty surprise last Friday when it left the level of its long bond purchases unchanged and lowered its overnight call rate from 0.25 per cent to 0.15 per cent. "This is a dangerous situation that looks bad for Wall St and may weaken the euro," said Mr Mitsuru Saito, chief economist at Sanwa Bank. "Bond markets in the US and Europe are collapsing because of the sell-off in the Japanese bond market." Mr Saito said that real long-term yields in Japan for wholesale investors were now more than 6 per cent, which comprised the 2.2 per cent long bond yield and the annual wholesale price index of --4 per cent. He said many big Japanese institutional investors had begun to sell Japanese Government bonds as well as US Treasury bonds and this was worrying for global markets. "US 30-year Treasury bonds have risen to 5.4 per cent, which is a very critical level that may affect the stockmarket," he said. Chief economist at Deutsche Bank in Australia, Mr Ivan Colhoun, said recent movements in global bond prices were a reflection of the fact that all capital markets had to compete with each other for global savings. "I think you can say that what is happening in Japan is a bit dangerous because rising bond yields are inconsistent with the state of their economy and it's not helping confidence," he said. Mr Colhoun said rising bond yields in the US were a concern because of the close relationship between bond yields and housing interest rates. Mr Toshifumi Umezawa, a bond market portfolio manager for Paribas Asset Management, said market fears that big Japanese banks would begin unloading their huge bond portfolios were unfounded but their activities in futures markets would be negative for bonds in the physical market. "The banks need bonds for their BIS ratios because government bonds are zero weighted," he said. "But the banks will attempt to protect themselves by hedging through the futures market and that may start a price spiral in the futures market." Yields on benchmark Japanese Government bonds have tripled in the past four months from 0.7 to 2.2 per cent amid rising concern among investors that the market will be unable to absorb the ¥71 trillion ($972 billion) in new bond issuance in fiscal 1999. According to at least one market estimate, Japan this year will account for up to 95 per cent of all government debt issued in the world and its bond market will overtake the US as the world's biggest. | ||||||||||||
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