Japanese government bonds fell Thursday, with 10-year rates touching 1 percent for the first time in a year, on speculation the U.S. Federal Reserve will curb stimulus and the Bank of Japan will tolerate an increase in yields.
Japan’s five-year note rate matched the highest in two years after Fed Chairman Ben Bernanke said Wednesday the Fed may trim bond purchases if policymakers see indications of sustained economic growth. The BOJ injected ¥2 trillion into the financial system to stem volatility following a circuit breaker in JGB futures trading.
“It was a kind of shock for bond holders,” Genzo Kimura, an investor at Sumitomo Mitsui Trust Asset Management Co., said of Bernanke’s comments. “We expected that he was not ready for tapering.”
Japan’s 10-year yield increased seven basis points, or 0.07 percentage point, to 0.955 percent as of 12:24 p.m. in Tokyo, according to Japan Bond Trading Co. The yield was as high as 1 percent earlier, a level unseen since April 5, 2012. The five-year rate rose three basis points to 0.425 percent and reached 0.455 percent, matching a level earlier this month that was the most since May 2011.
U.S. 10-year rates climbed to 2.07 percent Thursday, the highest level since March.
The Fed is buying $85 billion in Treasury and mortgage debt a month in its quantitative easing policy that aims to spur the economy by putting downward pressure on borrowing costs.
“We’re trying to make an assessment of whether or not we have seen real and sustainable progress in the labor market outlook,” Bernanke said in testimony to Congress. “If we see continued improvement and we have confidence that that is going to be sustained, then we could in — in the next few meetings — we could take a step down in our pace of purchases.”
The BOJ announced last month it would double monthly bond buying to more than ¥7 trillion to defeat deflation. Gov. Haruhiko Kuroda said Wednesday the BOJ will adjust the program as needed. He said he’s not expecting yields to jump a lot and volatility in the bond market isn’t affecting the economy yet.
“BOJ Gov. Kuroda’s press conference yesterday was disappointing to JGB market participants because he didn’t repeat his commitment in April when he said that the BOJ’s easing was intended to lower the yield curve,” said Naomi Muguruma, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Co. “He didn’t sound so concerned about the level of JGB yields.”
The BOJ’s injection of ¥2 trillion at all offices Thursday was done in response to excessive volatility in long-term yields, according to an official who asked not to be named due to the bank’s policy.
Futures on 10-year JGBs slid 0.73 to 141.17. They earlier slid as much as 1.2, tripping the Tokyo Stock Exchange circuit breaker.
“The level of benchmark yields is still in a low range historically, however, the pace of the rise in yields is too rapid,” said Soichi Okuda, chief economist at Sumitomo Shoji Research Institute, suggesting market players sense the BOJ accepts the yield rise.