Japan’s 10-year yield dropped through the central bank’s previous policy ceiling, as a global bond rally eased the pressure on the nation’s authority to normalize policy.
(Bloomberg) — Japan’s 10-year yield dropped through the central bank’s previous policy ceiling, as a global bond rally eased the pressure on the nation’s authority to normalize policy.
The benchmark yield fell as much as 5.5 basis points to 0.24%, the lowest since before the Japanese central bank unexpectedly doubled its ceiling to 0.5% in December. Ten-year overnight indexed swaps, which investors use to hedge against or bet on a change in bond yields, dropped below 0.5% for the first time since November.
The drop in yields and swaps came as the failure of Silicon Valley Bank stoked bets that the Federal Reserve will opt against faster interest-rate hikes or even pause this month, as higher funding costs take a toll on the financial sector. The Bank of Japan left monetary stimulus unchanged on Friday before economist Kazuo Ueda takes the helm at the BOJ next month.
“The banking shock in the US has significantly strengthened short-covering demand that we have seen since the BOJ’s March meeting,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. in Tokyo. “The current situation does help Mr Ueda given that markets gave him time to think about a change in policy.”
Since last year, traders have been betting that the BOJ would eventually be forced to give up on its ultra-loose monetary policy amid soaring inflation at home and abroad. To defend yield-curve control, the central bank had to boost bond purchases, leaving the debt market dysfunctional with poor liquidity.
Still, implied volatility of Japan’s bond futures rebounded from the lowest level since November on Monday, suggesting a path forward for the nation’s yields aren’t expected to be straight downward.
The rally in Japan’s bonds is “probably done,” said Martin Whetton, head of fixed-income and rates strategy at Commonwealth Bank of Australia. “The markets have moved an enormous amount very quickly. There is clearly a risk of a shift back the other way.”
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