What a bad week for G7 bonds.
Gapping yields. Lacklustre US Treasury auctions. Failed German ones. And now news reaches us that the Bank of Japan started selling international bonds last week.
Via BNP Paribas’ currency strategists:
The BoJ has started to sell international bonds according to the weekly security flow data released by the MOF. While the USD7bln weekly selling looks small in the context of the USD1trn reserve portfolio we view this bond liquidation with interest. At the time when 10-year US bond yields were trading near 4 % it was Japanese portfolio managers, including the reserve managers of the BoJ who understood what the ‘Japanisation’ of international bond markets meant. Japan bought bonds aggressively when bond yields were falling from 4% to 2.5%. Now BoJ data show that Japan has started selling bonds. On the other hand Japan has seen an increase of money market related inflows indicating that hedging of foreign asset holdings by Japanese institutions is still taking place. In the reporting week another USD6bln of hedges have been implemented. In total we estimate the entire size of currency hedges primarily held in short 3- 6mths USDJPY swaps at USD2.5trn.
It’s worth noting too that the bond sell-off has not passed JGBs by.
Yields on the 10-year Japanese government bond hit a new six-month high of 1.27 per cent after a BoJ official remarked that the recent rise in rates hadn’t had a big enough effect on Japan’s economy to warrant further action from the central bank.
Indeed, on Thursday Japan revised its third-quarter GDP growth to 4.5 per cent (annualised), up from the 3.9 per cent figure reported last month, but not exactly based on pure growth. The GDP deflator, a gauge of price trends, fell 2.4 per cent annualised in the quarter compared with the 2 per cent drop first reported.
Which means there are still participants looking for BoJ reaction — though they’re not sure it will be enough to halt a wider sell-off. From Marc Ostwald at Monument:
While we have focused on the woes of the US in recent days. It is worth noting that JGBs have also been falling out of bed. Indeed … the deepening deflation picture in Japan (eminently exacerbated by a strong JPY) looks to be a recipe for BoJ asset purchases, and in this revisionist environment — i.e. QE-type actions are no longer viewed as an all round ‘boon’ for all asset classes — then the lessons from the crash and burn sell-offs in 2003 and 2008 hint at the current sell-off potentially having a lot more downside, even if a short term correction looks to be necessary ahead of the next down-leg.
Related links:
Bloodbath of the bonds - FT Alphaville
US Treasuries hit by biggest sell-off in two years – FT