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JGBs exhibit record volatility as yields fluctuate wildly

by Yumi Ikeda

Bloomberg

Yield swings for five-year Japanese government bonds shot to record levels Monday, a day before an auction, after Bank of Japan Gov. Haruhiko Kuroda chose to leapfrog across notes and focus new purchases on longer debt.

Ten-day volatility in the yields soared to 434 percent Monday, 11 days after Kuroda announced a doubling of bond buying to get 2 percent inflation in two years.

The yields gyrated from a record low of 0.095 percent last month to 0.32 percent on Thursday as the BOJ unveiled its intention to buy JGBs maturing in as long as 40 years rather than gradually extending the original three-year limit.

The spike in volatility under Kuroda’s watch is a new development for JGB investors, who receive the lowest interest rates globally to hold part of the biggest debt pile. Kyle Bass, whose Hayman Advisors LP is betting on a collapse in the market, said bond holders’ initial reaction to BOJ stimulus may foreshadow a broader selloff. Their confidence will be tested at an auction of ¥2.7 trillion in five-year notes Tuesday.

“The BOJ’s monetary easing is so big that it’s caused the secondary market to malfunction,” said Shogo Fujita, chief Japanese bond strategist at Bank of America Merrill Lynch, one of the 24 primary dealers obliged to bid at government debt sales. “We’re likely to see investors demand higher yield premiums at the auction to offset the higher volatility risk.”

The BOJ will respond flexibly to rising price swings, bank officials told reporters Thursday after a meeting with market participants that marked another Kuroda innovation. It will consider announcing operation schedules in advance, they said.

The bank bought ¥3.71 trillion in government bonds last week, with its Friday purchases of one- to five-year notes drawing four times more bids than the amount offered.

The Finance Ministry’s sale of 30-year debt Thursday saw the widest gap between average and low prices in figures going back to April 2007, signaling weak demand. The previous auction of five-year securities on March 12 attracted bids that were 3.12 times the amount offered, the lowest bid-to-cover ratio since June.

The BOJ decided April 4 to double monthly bond buying to ¥7.5 trillion and lengthened the average maturity of these purchases twofold to about seven years. The bank’s previous program under Gov. Masaaki Shirakawa focused on notes maturing in one to three years.

The five-year JGB yield was little changed at 0.25 percent Monday after jumping six basis points, or 0.06 percentage point, to 0.255 percent Friday. The benchmark 10-year rate rose 1½ basis points to 0.635 percent.

“The medium-term sector yield upswing is justified by the bank’s decision to reduce JGB buying value in the five-year and shorter-term sector,” Akito Fukunaga, chief rates strategist at RBS Securities Japan Ltd., a unit of Royal Bank of Scotland Group, wrote in a research note Friday. “Rapid price movement reduced investor risk tolerance and further undercut liquidity.”

Elsewhere in Japan’s credit markets, Kintetsu Corp. priced ¥30 billion of four-year, 0.7 percent bonds for individual investors, according to a filing Friday with the Finance Ministry. The Osaka-based railway also sold ¥10 billion in three-year, 0.53 percent notes for institutions, according to Mitsubishi UFJ Morgan Stanley Securities Co.

Tohoku Electric Power Co., based in Sendai, hired banks for an offering of about ¥30 billion in seven-year and 10-year securities this month, according to a statement from Daiwa Securities Group Inc., one of the five sales managers.

Japan’s corporate bonds have handed investors a 0.41 percent loss this month, compared with a 0.65 percent decline for the nation’s sovereign debt, according to Bank of America Merrill Lynch index data. Company notes worldwide have returned 0.98 percent.

The yen reached a four-year low of 99.95 last week. The currency has plunged more than 11 percent this year, the most among the 10 developed-market currencies tracked by the Bloomberg Correlation Weighted Indexes, amid speculation of expanded fiscal and monetary stimulus.

The BOJ’s boosting of so-called quantitative easing won’t turn the economy around and is instead sending the nation toward default, said Takeshi Fujimaki, former adviser to billionaire investor George Soros and now president of Fujimaki Japan, an investment advising company in Tokyo.

“By expanding the monetary base to ¥270 trillion, the BOJ is making a huge bet, which I think it will ultimately lose,” Fujimaki said in an interview Thursday. “Kuroda’s QE announcement is declaring double suicide with the government. The BOJ will have to share the country’s fate and default together.”

The BOJ may raise its inflation forecast in its next outlook report due for release April 26, sources said. It may upgrade its view on price gains excluding fresh food to at least 1.5 percent from 0.9 percent for fiscal 2014, according to the sources, who asked not to be identified because the talks were private.

That compares with an average 0.2 percent decline in the so-called core inflation rate in the 10 years through 2012, data from the statistics bureau show.

Kuroda said Friday that the BOJ will continue monetary easing “as long as it is necessary” to achieve the 2 percent inflation target that the bank adopted in January at the urging of Prime Minister Shinzo Abe.

Soros said Japan is embarking on a risky experiment. If economic growth accelerates, there is a risk that interest rates will rise, making it difficult for the country to finance its debt, he said April 8 at the Boao Forum for Asia in Hainan, China.

Japan’s outstanding government bonds, bills and borrowings increased to a record ¥997.2 trillion at the end of 2012, according to government figures. The International Monetary Fund estimates that liabilities will grow to 245 percent of the nation’s economic output this year.

“The BOJ’s easing aims to achieve 2 percent inflation, so I don’t think bond yields will just continue to fall,” said Takeshi Minami, chief economist at Norinchukin Research Institute Co.