Japan’s benchmark bond yield rose above the central bank’s ceiling for a second day as investors bet on another hawkish pivot in policy as soon as this week.
(Bloomberg) — Japan’s benchmark bond yield rose above the central bank’s ceiling for a second day as investors bet on another hawkish pivot in policy as soon as this week.
The nation’s 10-year yield climbed one basis point to 0.51% after jumping as high as 0.545% on Friday before ending the day back at the Bank of Japan’s ceiling of 0.5%. Japan’s 10-year bond futures rose amid speculation some investors are making an arbitrage trade between the derivatives and cash market.
Japanese bonds yields are coming under upward pressure amid speculation the BOJ will abandon its yield-curve control policy as soon as this week’s meeting. The central bank’s decision to widen its trading band for 10-year bonds last month was meant to improve market functioning but has instead fueled bets on further relaxing of policy. This has required the BOJ to make even greater debt purchases, threatening to reduce liquidity even more.
The BOJ purchased a combined ¥1.4 trillion ($11 billion) of debt across maturities ranging from one year to 25 years on Monday, and offered to buy an unlimited amount of two-year notes at a fixed yield of 0.03%. These are on top of its daily offer to purchase unlimited quantities of 10-year bonds and futures-linked securities at 0.5%. The BOJ announces its next policy decision Wednesday.
“If a restoration of bond-market functioning was really the main reason for the BOJ’s policy tweak last month, the central bank would have to abolish yield-curve control this week,” Kazuhiko Sano, chief bond strategist at Tokai Tokyo Securities, wrote in a research note. “An end to yield-curve control would prompt the market to price in an end of the negative-rate policy and a few more rate hikes, threatening to push yields higher.”
Japan’s 10-year bond futures rose for the first time in five days after the price discount to underlying securities expanded to the widest since June. The BOJ’s lending of government securities climbed to a record on Friday.
The rise in so-called basis trades may increase the risk of another blowup similar to that which took place in June. Back then, the BOJ started to target futures-linked securities in its unlimited purchase operations. The central bank now owns about two-thirds of what are referred to as cheapest-to-deliver securities. A basis trade is where investors either go short or long on cash bonds, and take the opposition position in futures.
“Some arbitrage trading seem to be going on that involves short positions on cash bonds and long positions on futures,” said Ataru Okumura, a rates strategist at SMBC Nikko Securities Inc. in Tokyo. “The very low amount of bonds left in the market and the increase in BOJ lending of the securities suggest arbitragers may be borrowing bonds” from the central bank to engage in basis trades, he said.
–With assistance from Saburo Funabiki.
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