JAPANESE sovereign bond yields are surging to the highest levels in more than a decade amid signs the central bank is ready to reduce debt purchases to ease pressure on the ailing yen.
The yield on 20-year sovereign debt rose 3 basis points to 1.765 per cent after touching 1.77 per cent, the highest since 2013, while the 30-year yield reached its highest since at least 2011. The benchmark 10-year yield increased 2.5 basis points to 0.965 per cent, just shy of a more than decade high.
The Bank of Japan (BOJ) on Monday (May 13) offered to buy a smaller amount of bonds, raising speculation it will accelerate the pace of monetary policy normalisation to support the currency. Its next bond-purchase operation is on Friday. An auction of five-year notes also saw tepid demand, adding to signs of upward pressure on yields.
“Investors are reluctant to buy bonds on concerns the BOJ will cut the purchase amount again on Friday,” said Tadashi Matsukawa, head of fixed income at PineBridge Investments Japan. Investors are also cautious ahead of US inflation data on Wednesday, he said.
Japanese bond yields have been pushed upward by rising US yields and lingering speculation the central bank will deliver an additional interest-rate hike sooner rather than later. The wide yield gap between Japan and the rest of the world, especially the US, has been fuelling the yen’s depreciation.
The yen weakened slightly to 156.40 against the US dollar, on track to fall for a third straight day.
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While higher bond yields may support the yen by increasing their appeal for Japanese investors, there’s scepticism in the currency market about whether the BOJ will let yields climb too sharply.
“The view in the foreign exchange market that the BOJ will emphasise stability in interest rates is very ingrained,” said Shusuke Yamada, head of Japan currency and rates strategy at BofA Securities Japan. “Unless the BOJ makes a series of further reductions or issues a clear message of quantitative tightening, the effect on the yen will start to be lost.”
Finance Minister Shunichi Suzuki said at a press conference on Tuesday that the government will closely monitor the exchange rate situation and take all possible measures as needed.
Japanese government bond yields will probably stabilise around current levels while those in most developed markets decline, providing support for the yen, according to Capital Economics.
The 10-year Treasury yield will probably fall to 4 per cent at the end of this year, reducing the difference with its counterpart in Japan to about 300 basis points, Capital Economics senior markets economist Hubert de Barochez wrote in a note dated on Monday. This should boost the yen to 145 per US dollar at year-end, he said. BLOOMBERG
