Volatility is back in Japan’s bonds as traders confront Kuroda

Bloomberg

The day after Haruhiko Kuroda pledged to allow greater swings in Japan’s giant bond market while pushing back against rapid increases, traders are putting him to the test.
Moves in 10-year government debt futures were so extreme — a drop of as much as 0.5 percent, the most in almost two years — that they triggered an emergency margin call from the clearing house. In the cash market, the yield on benchmark securities rose 6 basis points to an 18-month high of 0.12 percent.
The Bank of Japan hadn’t announced a fixed-rate bond-buying operation that would help to cap yields.
The return of volatility is a welcome sight to traders in Japan, where unprecedented easing has created a market that’s heavily distorted by the central bank’s influence. Kuroda acknowledged that criticism and said that the BOJ will double the range allowed for the benchmark under its yield-curve control policy, signaling atolerance for the yield to climb to about 0.2 percent. For global investors, that risks stoking higher borrowing costs across other debt markets, with 10-year Treasury yields edging closer to 3 percent.
“Markets are testing to see at which rate the BOJ will conduct a fixed-rate operation,” said Shinji Hiramatsu, general manager at the fixed-income investment department of Sompo Japan Nipponkoa Asset Management Co. in Tokyo.
“If markets continue to try and push the 10-year yield to 0.15 percent, the BOJ would have to step in.”
The recent policy adjustments, made to help the BOJ sustain its monetary easing with its inflation target still far away, were seen giving Japan’s moribund debt market more breathing room.
Traders are waiting to see how the central bank implements its changes through the conduct of fixed-rate operations whenever yields threaten to breach its control.
International bond traders are closely watching the rise in yields, given that Japanese investors hold $2.4 trillion of overseas debt. Speculation over BOJ policy helped shake Treasuries out of a tight trading range earlier in July, and the policy tweaks drove global yields lower.