Prices of benchmark Japanese government bonds fell steeply Tuesday, at one point sending yields to their highest levels in 2 1/2 years.
In interdealer trading, the yield on the No. 252 10-year JGB, regarded as Japan’s key long-term interest rate, rose to 1.670 percent, the highest yield on a benchmark issue since December 2000.
It was sharply up from 1.58 percent late Monday and almost four times the historic low of 0.43 percent seen in early June.
Bond yields move in the opposite direction to bond prices.
Dealers said banks and other institutional investors unloaded their bond holdings amid recent rises in stock prices.
The recent volatility may drive banks that are required to limit the risk of losses on their holdings to sell more bonds in the future.
Since June 11, Mizuho Financial Group Inc. and six other banking groups have incurred losses worth a total 929.9 billion yen on their bond holdings, according to a report by Daiwa Securities SMBC Co.
Sales of bonds also accelerated Tuesday morning because investors had widely expected that the planned September issue of 10-year bonds by the Finance Ministry would be unpopular.
But the auction results for the 10-year JGBs showed solid demand. The ministry auctioned about 1.5 trillion yen worth of the bonds, with bids totaling 4.63 trillion yen.
The new issue carried a coupon of 1.6 percent, sharply up from 1 percent in the previous month’s issue.
Concerned about the jump in the rate of benchmark JGBs, Finance Minister Masajuro Shiokawa called the recent surge in long-term interest rates too volatile.
An increase in bond yields can threaten the nation’s economic recovery by boosting rates on corporate loans and mortgages.
Shiokawa said he hoped the rates would cool down. For this to happen, the Bank of Japan must continue its easy monetary policy by continuing to purchase JGBs through market operations, he said.
“I don’t think it is good for the long-term interest rates to fluctuate so sharply,” Shiokawa told a news conference. “I hope the rates will come back to where they should be.”
Shiokawa said he agreed with U.S. Treasury Secretary John Snow, who warned Monday in Tokyo against any interest rate increase when economic growth has not been confirmed.
But Chief Cabinet Secretary Yasuo Fukuda downplayed the rise in interest rates, saying it reflects improving economic conditions.
“It will be no problem” if the yield rises in line with stock prices, he told a news conference earlier in the day.
Shares hit their highest levels in more than a year Tuesday on the Tokyo Stock Market, with the 225-issue Nikkei stock average gaining 19.90 points to close at 10,690.08.