Japan’s bond market wants BOJ to purchase more short-term notes

Auction Demand

Implied volatility of Japan’s 10-year note futures, a measure of expected moves used to price options, climbed to 7.23% on May 28, the highest since November 2008, according to data compiled by Bloomberg. A sale of 20-year debt this week drew the lowest demand since August 2012.

The 10-year JGB yield rose three basis points to 0.935% yesterday, the highest close since April 2012. The rate has almost tripled from the record low 0.315% reached on April 5.

After meetings with market representatives last month, the BOJ revised its monthly bond purchases to “approximately 7+ trillion yen” ($69 billion) per month from an earlier estimate of 7.5 trillion yen.

BOJ policy board member Ryuzo Miyao said this week that the central bank’s bond buying will “strongly support” growth by keeping interest rates lower even when improved economic prospects put upward pressure on borrowing costs.

‘Healthy Sign’

So far, policy makers are getting the opposite results. As JGB yields climbed, the benchmark lending rate for large corporations, known as the prime rate, rose 10 basis points from its record low to 1.25% on May 10, according to Mizuho Corporate Bank Ltd. Rates for 35-year home loans inched higher to 1.81% this month from an all-time low of 1.8% in April, data from the Japan Housing Finance Agency show.

For supporters of Abenomics like Jesper Koll, JPMorgan Chase & Co.’s head of equity research in Tokyo, the rise in JGB yields is a “healthy sign” that the economy is improving and investors are seeking riskier assets. For J. Kyle Bass, whose Hayman Advisors LP made $500 million amid the U.S. subprime crisis and is now betting on a fiscal collapse in Japan, it means the BOJ will have to “dramatically” increase bond-buying efforts to counteract investor selling.

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