(Bloomberg) — Japan’s new benchmark 10-year government note has brought a fresh headache for the nation’s central bank in its battle against bond bears.
(Bloomberg) — Japan’s new benchmark 10-year government note has brought a fresh headache for the nation’s central bank in its battle against bond bears.
The yield on the December 2032 note traded at 0.5% — the BOJ’s new ceiling for 10-year debt — on Friday compared with just under 0.42% for the previous benchmark. The pressure on yields saw the central bank defend its 0.5% cap with an increase in bond purchases.
A sustained rise above that level risks leading to runaway speculation that the BOJ will raise its yield ceiling further or abandon its policy of negative short-term interest rates.
“Many market participants are probably thinking there’s more upside to 10-year yields,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. “The additional buying must be a message from the BOJ that it won’t be pushed back by the market again and that it will defend the new ceiling at any cost.”
On Friday, the central bank bought an additional ¥300 billion ($2.2 billion) for five-to-10 year notes on top of scheduled purchases of ¥1.23 trillion for tenors of five years or less and ¥300 billion for 10-to-25 year bonds. These are on top of a standing daily offer to buy unlimited amounts of 10-year notes and futures-linked securities at 0.50%.
It was the fifth additional debt-buying operation in the last six sessions.
“One of the reasons the BOJ has bought a lot of bonds recently is to mitigate market volatility and smooth out the impact of an upcoming further policy change,” said Masayoshi Kojima, a senior market strategist at Mitsui Sumitomo Insurance Co. in Tokyo. “All options can be on the table.”
The central bank also offered zero-interest two-year loans for a third day. The amount on offer was ¥2 trillion, the same as Thursday. As borrowed funds from such operations are often used to buy government debt, it is seen as a tool to keep short-term yields in check.
“To buy time, the BOJ is doing a lot of purchases and 0% lending operations to show that the next change is not near,” said Kojima. “I think the hurdle is actually low today for the BOJ to change its policy due to market functioning, but I don’t think we will see the change at the next meeting.”
BOJ Is Said to See Little Need to Rush Big Yield Adjustments
Bloomberg News reported Friday that BoJ officials see little need to rush to make another big move to improve bond market functioning, according to people familiar with the matter. Instead, they will prioritize studying the effects of December’s changes, the report added.
–With assistance from Hidenori Yamanaka and Alice Gledhill.
(Adds reference to Bloomberg report on BoJ in final paragraph.)
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