Japanese government bonds fell further on Wednesday, increasing pressure on the central bank to raise its yield-curve cap and prepare for an end to its negative interest-rate policy.
Market expectations that the Bank of Japan is getting closer to lifting interest rates have pushed bond yields to the highest in a decade. Five-year yields climbed to levels last seen in 2013 and the 10-year equivalent reached 0.8% for the first time since August that year, following similar moves for longer-maturity debt in recent days.
Swap rates used to hedge against or bet on bond yield shifts have also surged. Meanwhile, debt yields in the US are rising even faster than those in Japan, adding to the turmoil and sparking concern that investors will demand higher rates to keep their money in Japanese bonds.
Investors worldwide are watching developments intently given the risk that upticks in Japan’s yields may spur institutions from life insurers to pension funds to cut back their massive holdings of overseas debt, including US Treasuries.
The yen’s slide toward multi-decade lows against the dollar is making the BOJ’s job more difficult because holding yields down tends to weaken the currency. It depreciated past 150 to the dollar on Tuesday, raising alarm in the government and speculation that Japan may have entered the market to arrest the move.
Read: Japan Keeps Yen Traders Guessing Over Whether It Intervened
“It looks like the ground is being set up in rates markets to prey on the vulnerability of the BOJ, the finance ministry and the government,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. “Policy rates that will stay higher for longer and political disorder in the US will push not only Treasury yields higher but JGBs as well and it’s not easy for the BOJ to stop it.”
Japan’s 10-year overnight indexed swaps touched 1% on Wednesday, the highest level since January, suggesting that investors are hedging against the risk that the benchmark 10-year yield will reach the central bank’s effective ceiling. That’s even after Governor Kazuo Ueda has insisted that the central bank remains far from a policy shift.
Five-year JGB yields rose 2 basis points to 0.34%, following US Treasury rates higher during the Asian day, and the 10-year counterpart traded at 0.805% as of 3:22 p.m. in Tokyo.
The rise in JGB yields is largely due to US Treasury yields increasing, and also speculation that the BOJ may revise the negative rate policy and YCC early, said Jun Ishii, a senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “Overnight-indexed swaps will also depend upon these factors.”
The message from US markets, which is resonating around the world, is one of higher rates for longer. Federal Reserve Vice Chair for Supervision Michael Barr said the biggest question before central bankers was how long to leave rates elevated, while known hawk Michelle Bowman reiterated her call for multiple hikes. Global government bonds lost 4.2% in the July-September period, the biggest quarterly drop in a year.
--With assistance from Mia Glass.
(Updates with increase in 10-year yield in second paragraph, adds quote in eighth paragraph.)
