Bond buyer strike in Japan gives yield curve a powerful jolt

Bloomberg

Japan’s sovereign yield curve has been jolted into life as a buyer’s strike and dovish central bank triggers a sharp steepening — setting the market aside from global peers.
The move looks set to continue as the big institutions that dominate purchases of super-long maturities stick to the sidelines, hurt by the recent turmoil in global stocks and bonds. Others are waiting for new investment allocations or busy tidying up portfolios for the end of Japan’s fiscal year in March, according to analysts.
The gap between Japan’s benchmark 10-year bond yield and its 30-year equivalent has widened to a three-year high, climbing more than 10 basis points in a little over two weeks. That steepening stands in stark contrast to flattening trend seen in equivalent Treasuries and German bund curves.
While bond investors around the world reel under the impact of hawkish central bankers, Japanese ones still operate under the super-easy policy of the Bank of Japan. The BOJ remains wedded to capping 10-year yields at the top of their target range and looks content for now to allow longer-dated equivalents to push higher — steepening the curve.
BOJ Governor Haruhiko Kuroda told lawmakers that super-long yields that are too low could have an adverse effect on pension funds. The central bank kept planned purchase amounts for super-long bonds unchanged at Wednesday’s
regular market operations.
Longer-maturity yields have barely reached levels that might trigger buying from Japan’s giant life insurers, according to Yusuke Ikawa, a strategist at BNP Paribas in Tokyo. That would be 0.90% for 30-year JGBs, about where the bonds traded.
Japan’s equity benchmark the Topix Index has fallen about 8% from a September high.
Life insurers may not even have the funds to take advantage of the rise in yields, thanks to sluggish business trends and a faster pace of purchases
earlier, according to Morgan Stanley MUFG’s Sugisaki.
Japan Securities Dealers Association data showed net purchases of super-long JGBs were at 1.9 trillion yen in the October-to-December quarter compared to 3 trillion yen for the fiscal first half from April.
The unwinding of a popular relative value trade also points to a potential source of pressure on Japanese bonds.

Fear of catching a falling knife may also hold insurers back, not least because they have seen what happened to European bonds when there was a sudden shift, he added. Last week, European Central Bank President Christine Lagarde declined to rule out the possibility of a rate hike this year, spurring traders to expand their bets.
While Kuroda has been pushing back against a possible shift in policy, there is growing speculation as his term ends next April. Political pressure could see the BOJ offer hints of policy normalization at its March meeting, giving an upside risk to yields, said Yusuke Hashimoto, fixed-income portfolio manager at AllianceBernstein Japan.
The unwinding of a popular relative value trade also points to a potential source of pressure on Japanese bonds. Traders selling US or European debt on the prospects of policy normalization often hedged positions with purchases of JGBs, according to BNP’s Ikawa.