Investors are starting to flee what used to be the slowest-moving major debt market after Bank of Japan Governor Haruhiko Kuroda’s stimulus caused price swings to increase by the most in the world this year.
Price volatility for Japanese government bonds has climbed 2.6 percentage points this year to 3.66 percent, the largest advance among 26 sovereign-debt markets and the European Federation of Financial Analysts Societies. Swings in German bunds increase 0.48 percentage point during the period, while those for U.S. Treasuries increased 0.07 point.
Japanese money managers purchased more overseas bonds than they sold for three straight weeks through May 10, in line with Kuroda’s goal of pushing investors out of sovereign debt and into riskier assets such as foreign notes. While the increase in investments abroad is a sign that his financial stimulus is acquiring traction, it’s been accompanied by emerging JGB volatility and higher interest rates that could weigh on the economy.
“The BOJ’s aim was to spur portfolio rebalancing by keeping bond yields low, but it now faces the chance of triggering that in an unintended way by increasing volatility,” said Shogo Fujita, the chief Japanese bond strategist in Tokyo at Bank of America Merrill Lynch, one of the 24 primary dealers obliged to bid at government debt auctions. “It’s ironic --they may accomplish their goal, but not quite in the way they intended.”
Yield Swings
The central bank decided on April 4 to double government bond purchases to more than 7 trillion yen ($68 billion) a month, marking an expansion of monetary stimulus that was larger than analysts expected, aimed at achieving 2 percent inflation in two years.
The policy move caused benchmark 10-year yields to fall to a record low of 0.315 percent the next day, before rising as high as 0.92 percent last week as the easing sparked a 22 percent advance in the Topix Index (TPX) of shares and boosted inflation expectations.
Kuroda and his policy board will discuss the impact of the rising bond yields at their two-day meeting starting May 21, the Nikkei newspaper reported last week, without citing anyone.
The yield swings caused the historical volatility for JGBs to surge to 3.66 percent as of May 17 based on a 60-day reading, compared with 1.06 percent at the end of last year, the lowest globally, according to data compiled by Bloomberg and the EFFAS. The measure of price fluctuations for bunds was at 3.68 percent last week and 3.12 percent for U.S. Treasuries.
Rabobank Samurai
Elsewhere in Japan’s credit markets, Rabobank Nederland offered 101.5 billion yen of Samurai bonds split into four tranches on May 17, including 43.5 billion yen of 0.708 percent, five-year notes. It was the Dutch lender’s first sale of the yen notes in seven months.
Mitsubishi Chemical Holdings Corp. hired banks for a three-tranche bond offering, according to Nomura Holdings Inc., which is managing the deal with four other firms including Daiwa Securities Group Inc.
Samurais, which are yen-denominated bonds offered in Japan by overseas borrowers, have handed investors a 0.14 percent loss this month, according to Bank of America Merrill Lynch data. That compared with a 0.38 percent drop for domestic corporate notes and a 0.55 percent decline for company paper worldwide.
The yen has fall down to more than 15 percent this year versus the greenback, the largest decliner among 16 major currencies. It reached 103.31 per greenback last week, the worst since October 2008, and was at 102.84 at 10:37 a.m. in Tokyo today.
Fund Outflow
As bond-market volatility jumped in Japan, the country’s money managers sent their cash abroad.
Japanese investors increased holdings of overseas debt by 186.4 billion yen in the week ended May 10, bringing total net purchases to 692 billion yen since April 19, according to a report from the Ministry of Finance last week. Prior to that, they had cut their stakes in the securities for six straight weeks, the longest streak since January 2010.
The yen’s weakening is also spurring investments abroad as overseas assets turn more appealing in Japanese currency terms. Government bonds issued by Group of Seven countries excluding Japan have returned 18 percent this year in yen terms, compared with 0.55 percent for Japan’s government bonds, Bank of America Merrill Lynch indexes show.
Japan’s five-year note yield rose above similar-maturity bonds last week for the first time on record, according to Bloomberg data going back to 1990. The JGB rate was at 0.37 percent on May 17, compared with 0.35 percent in Germany.
BOJ Support
The local debt market may settle down as the BOJ continues to snap up bonds, according to Makoto Yamashita, the chief Japan rates strategist in Tokyo at Deutsche Securities Inc., a primary dealer. The central bank is set to buy more than 50 percent of the debt the government plans to issue this year.
“Bond yields will probably stop rising,” Yamashita said. “Even when there are sell-offs of bonds, the BOJ is there to absorb them with large-scale purchases.”
In a test of investor demand for the nation’s longest-maturity sovereign securities, the Ministry of Finance will auction 400 billion yen of 40-year bonds tomorrow. The previous offering on Feb. 13 drew bids valued at 3.51 times the amount available, down from 3.82 at the prior sale in November.
The world’s third-largest economy has grown faster than analysts expected after Prime Minister Shinzo Abe took power in December, pledging to end more than a decade of deflation. Gross domestic product expanded at an annual pace of 3.5 percent in the first quarter, the most in a year, according to government figures released last week.
Inflation Expectations
The breakeven rate, a measure of investors’ outlook for consumer prices, signaled last week annual inflation in Japan of 1.84 percent over the next five years, the most on record going back to June 2009. Consumer prices excluding fresh food fell 0.5 percent from a year earlier in March, the fifth straight month of declines, according to government data released last month.
Japan’s benchmark 10-year yield completed a second consecutive weekly advance on May 17, rising 23 1/2 basis points to 0.795 percent, the biggest increase in five year. It was at 0.83 percent today, still the lowest globally after Switzerland.
“If yields rise further, the rationale behind the BOJ’s plan will be called into question -- indeed, to some extent, it already is,” Nicholas Spiro, the managing director of Spiro Sovereign Strategy in London, said in an e-mail interview, referring to Japanese bonds. “And JGBs themselves may prove more attractive to yield-hungry investors.”
