February 2, 2023

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BOJ ramps up bond buying to limit rise in yields

The Bank of Japan’s (BOJ) decision to double its 10-year yield cap should improve the functioning of the markets. So far, this has prompted even more central bank intervention and threatens to further reduce liquidity in the local bond market.

The BOJ on Wednesday announced a fourth day of unscheduled asset purchases, offering to buy unlimited amounts of 600 billion yen ($4.6 billion) of two- and five-year debt securities and bonds with maturities of one to 25 years . The announcement came on top of its stellar daily offer to buy unlimited amounts of 10-year and futures-linked securities at 0.5 percent, the new cap on benchmark yields.

Wednesday’s move came despite a strong start to the year in global bond markets, with rising Treasuries and German Bunds rising on signs of easing inflation. But buying failed to stop the sell-off in benchmark Japan bond, with yields closing 4 basis points higher at 0.45 percent on fears Thursday’s auction of a new 10-year note will spark weak investor demand.

The yield curve shift in December has prompted traders to continue betting that the BOJ will raise its cap further or abandon it altogether if inflation picks up in Japan. This triggered a debt sale that required even more bond purchases from the central bank to keep yields under control.

The BOJ conducted similar purchase operations between Dec. 28 and 30, buying bonds totaling 2.3 trillion yen.

“The BOJ is showing an abundance of caution as bets on higher JGB yields may have become too one-sided,” said Eugene Leow, fixed income strategist at DBS Bank Ltd. in Singapore. I would “focus on the bigger picture of CPI and further potential yield curve tax shifts in the coming months.”

BOJ Governor Haruhiko Kuroda on Wednesday reiterated that the bank will continue monetary easing to reach its sustainable price target, speaking at a financial industry event.

Auction on Thursday

Thursday’s sale of benchmark bonds could yield a little over 0.5 percent, Keisuke Tsuruta, a bond strategist at Tokyo-based Mitsubishi UFJ Morgan Stanley Securities Co., wrote in a note. With the yield kept below the 0.5 percent cap, 10-year notes look overvalued relative to other maturities and swaps, he said.

For Steven Major, head of fixed income research at HSBC Holdings Plc., the BOJ’s change in yield curve control in December was not necessarily the start of a hawkish turn, thanks in part to the risk of a global recession, including in Japan. It was more of a “curve ball” for technical factors specific to the local bond market.

“It was a technical adjustment to buy more time,” he said on Bloomberg Television on Wednesday. “The tipping point of sorts came in October when we hit the peak for dollar-yen and the maximum steepness on the long end of the Japanese curve and the realization that there were no more bonds to buy.” Bloomberg news

Photo credit: Bloomberg