Bond traders are on guard for a further five-basis-points increase in benchmark Japanese bond yields amid speculation that it would trigger another foray into the market by the central bank.
The yield on 10-year government notes has already climbed about 20 basis points to a nine-year high of 0.655% reached on Thursday since July 27, the day before the Bank of Japan adjusted policy to allow the rate to increase to as high as 1%. The moves come amid upward pressure on rates globally, with long-term US yields surging to their highest since November as the Treasury market comes close to erasing this year’s gains.
In Japan, the question is how far and how fast the BOJ will let rates rise under its tweak to yield-curve control. The central bank came in around 0.6% on Monday and as 0.65% was breached on Thursday. Traders are keeping a close eye on how fast the benchmark yield, which slipped a half basis point to 0.64% as of 3:45 p.m. in Tokyo on Friday, may rise through the next psychologically important line of 0.7%.
“A rise to 0.7% is possible and the BOJ may continue to slow the pace of yield gains if it reaches that level too soon,” said Hideo Shimomura, senior portfolio manager at Fivestar Asset Management Co. in Tokyo. “The BOJ doesn’t want a sharp, one-way move close to 1%. Operations so far seen more ‘smoothing’ actions rather than efforts to stop gains. They may tighten their grip more if the 10-year yield rises near 0.8%”
Deputy Governor Shinichi Uchida said earlier this week that the central bank will step into JGB market depending on the pace of yield increases and does not expect a sharp, big increase in long-term yields. Adjustments to its yield-curve control were needed to continue with the policy, he added.
“The BOJ may kick in as yields rise about five basis points higher than the previous unscheduled operation,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. “They kicked in because they wanted to show they are watching the whole curve and show YCC is alive.”
The central bank may feel it necessary to step into the market if the 10-year yield trades around 0.7%, Ng Kheng Siang, head of Asia Pacific fixed income at State Street Global Advisors in Singapore. said on Bloomberg Radio.
Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank, said traders will probably continue to test the upside of JGB yields, especially at times when Treasuries are being sold off.
Pension Funds, Insurers
Continued upticks in Japanese yields are also being watched because any rise in yields at home adds incentives for Japanese investors to bring more of their funds back home. The nation’s life insurers and pension funds are owners of vast amounts everything from Treasuries to sovereign bonds in Europe and Australia.
A surge in domestic stocks has compensated for losses on overseas debt at Japan’s state pension fund, the world’s largest. With about half of total assets invested in domestic and overseas debt, the Government Pension Investment Fund’s performance remains vulnerable to higher yields and volatility in the yen.
Fukoku Mutual Life Insurance Co., with $62 billion of assets, said it anticipated a policy adjustment and already had plans in place to reduce its holdings of overseas debt.
(Updates yield move in third paragraph, adds GPIF in 10th paragraph.)