Japan’s benchmark yield edged back above the central bank’s ceiling amid a global bond selloff and as traders turned their focus to next week’s key policy meeting.
(Bloomberg) — Japan’s benchmark yield edged back above the central bank’s ceiling amid a global bond selloff and as traders turned their focus to next week’s key policy meeting.
The 10-year yield added 0.5 basis points to 0.505% before erasing the rise. Bank of Japan Governor Haruhiko Kuroda will announce his final policy decision on March 10.
Traders continue to bet on further policy tweaks from the BOJ, with many speculating its cap on bond yields will have to be scrapped as it looks increasingly unsustainable amid rising inflation at home and abroad. Some have flagged the outside risk of a surprise move in March, with Kuroda adjusting policy to smooth the transition process for his likely successor, economist Kazuo Ueda.
“A small amount of selling in very thin liquidity has spurred the rise in the yield above 0.5%,” said Keisuke Tsuruta, a bond strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo.
In December, Japan’s central bank doubled its policy ceiling to 0.5%, in a bid to improve market functioning but just ended up buying more bonds to defend the new cap. That surprise move sent yields and the yen higher and touched everything from US equity futures to the Australian dollar and gold.
Thursday’s auction of 10-year Japanese government notes received the largest bids relative the amount sold since 2005, suggesting dealers tried to buy the securities with a yield above 0.5% to sell them to the central bank.
Signals from the options market suggest yen traders are taking the risk of a further policy tweak seriously. One-week risk-reversals for dollar-yen — a gauge of expected direction for the pair over that time frame — have slumped well below zero.
Ueda completed two days of confirmation hearings in parliament on Monday. While investors said his comments to lawmakers were broadly as expected and contained little to change their convictions on the BOJ’s path for policy, others saw a slightly dovish bent.
Meanwhile, data Friday showed inflation in Tokyo decelerated sharply for the first time in more than a year, as ramped-up government subsidies masked a strengthening price trend.
–With assistance from Daisuke Sakai and Hidenori Yamanaka.
(Adds Thursday’s 10-year note auction in sixth paragraph.)
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