Amazing action in the normally sedate Japanese government bond market actually forced the Tokyo Stock Exchange on Friday to order an unprecedented 15-minute halt in trading of JGB 10-year bond futures. The Exchange made the move in an effort to calm hectic dealing in what Reuters described as “one of the worst sell-offs in the past decade”.
JGB bond futures ended down 1.40 per cent after plunging as much as 1.8 per cent - causing the biggest jump in five-year yields in nine years after inflation accelerated, global stocks climbed and the dollar rallied against the yen.
Behind the extraordinary rout was new speculation that the Bank of Japan would increase its target interest rate this year. Yields on five-year notes have risen half a percentage point since reaching a 2.5-year low on March 17 as the dollar rebounded, commodity prices jumped and traders bet new central bank governor, Masaaki Shirakawa, will focus on curbing inflation.
Driving the concerns, the Japanese statistics bureau said consumer prices climbed 1.2 per cent from a year earlier in March.
JGBs had rallied since June last year as some of the biggest global funds, including Pimco, bought the world’s lowest-yielding debt on expectations the yen would gain and the US and Japanese economies would enter recession, noted Reuters. But so far this month, they have handed local investors a loss of about 1.2 per cent, according to a Merrill Lynch index, while the Nikkei 225 Stock Average has climbed 11 per cent, according to Bloomberg.
According to one man who knows more about JGBs than most - Tohru Sasaki, forex strategist at JPMorgan Chase in Tokyo - Friday’s drastic movement in Japanese yields should be regarded as driven by technical, rather than fundamental, factors.
Those technical issues, notes Lex, turned “what could have been an orderly unwinding” into a rout. “Golden Week”, a string of national holidays kicking off on Tuesday, means trading volumes will be feeble over the next fortnight. That period coincides with a couple of big events: the Fed meeting and the BoJ’s release of its quarterly economic outlook, which is widely expected to prune growth expectations.
It would “take a brave bond holder to take a contrarian stance ahead of a week like that”, it adds.
The market is now pricing in more than 100 per cent probability of a Japanese interest rate hike by next February - it was only 50 per cent on Thursday, says JPMorgan’s Sasaki. Bloomberg adds that the odds the central bank will raise rates this year climbed to 83 per cent from 39 per cent on Thursday, according to calculations by JPMorgan using interest-rate swaps. This is compared to last month, when the market was betting that the chances of a rate cut were more than 70 per cent.
“It’s hard to think the Bank of Japan’s stance on monetary policy will change just because of a rise in cost-push inflation,” Mamoru Yamazaki, chief economist at RBS Securities, told Reuters.
“But it may stir talk among market players that it may become more difficult for the BOJ to lower interest rates … so I think it is negative for Japanese government bonds.”
It’s seldom said, concludes Lex, “but the JGB market will be no place for the faint-hearted in coming weeks”.
