April 16, 2013 11:48 am
Japanese easing plays havoc with JGBs
So much for Haruhiko Kuroda’s plans to ease the flow of credit.
Since the new governor of the Bank of Japan shouldered his “big bazooka” two weeks ago, promising to buy up more government bonds than ever to drive down the cost of borrowing, yields have risen at every point along the country’s 30-year sovereign debt curve, prompting some banks to charge more for loans.
At the same time, trading volumes in Japanese government bonds – or JGBs – have collapsed, sending volatility to record highs and threatening the ability of the world’s most indebted government to keep funding itself at the world’s lowest rates.
An auction last week of 30-year bonds was “horrendous”, in the words of one strategist, with the widest ever spread between lowest and average bid prices providing evidence of shaky demand.
Traders and analysts say that some of the turmoil can be traced to the actions of a single large bank that took profits by dumping JGB holdings the day after Mr Kuroda’s debut, triggering similar sell-offs elsewhere.
But they argue that most of the blame should be laid at the door of the central bank, which has not done enough to lay out the full implications of this dramatic shift from the previous monetary easing regime.
Net annual asset purchases by the BoJ have risen to nearly 15 per cent of nominal gross domestic product, notes Nomura, making Mr Kuroda’s “new phase” of easing significantly bigger than any equivalent operation around the world.
Moreover, this is not ordinary QE but “qualitative and quantitative easing” in the BoJ’s terminology. As the central bank more than doubles its monthly bond purchases – mopping up about 70 per cent of new issuance from the government – it will also double the average maturity of its holdings to about seven years from three.
Amid the “shock and awe” of this radical policy shift, investors in Japan’s Y914tn ($9.4tn) government bond market, the world’s second-largest, have “lost their bearings”, says Naka Matsuzawa, chief Japan rates strategist at Nomura in Tokyo.
If volatility remains elevated for much longer, analysts warn that value-at-risk models may force investors to liquidate JGB holdings, pushing yields higher. That may mean that the BoJ finds it more difficult to create expectations of negative real rates – which are seen as essential to spur broad demand across Japan for loans and riskier assets.
“For now, the easing programme that was announced with such fanfare must be judged a failure,” says Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.
What happens this week could be vital in restoring order, analysts say.
On Wednesday afternoon, the BoJ will hold a special meeting with 30 JGB traders, aiming to flesh out some of the concerns raised in a get-together last week with more senior staff at financial institutions.
After that meeting, the BoJ said it would buy Y2.5tn of bonds with up to 10 years to maturity the following day, the first time it had given more than a few hours’ notice of any asset purchase. But some say that, in future, more detail on the timing and sizes of the BoJ’s Y7.5tn of monthly bond purchases will be needed, so that investors can get a better sense of supply and demand.
“The longer the schedule the BoJ can provide, the better,” says one senior Tokyo trader. “If you can see the next couple of months, of maybe the next quarter of buybacks, you can start to construct portfolios and offset what you’re going to be buying in auctions.”
Analysts will also be watching closely over the government’s auction of Y1.2tn of 20-year bonds on Thursday, which is the last super-long auction before the Golden Week holidays. If the spread of bids is much narrower than last week’s offering of 30-year bonds, volatility in the broader market should recede, says Takehito Yoshino, senior fund manager at Mizuho Trust & Banking.
For now, the good news for Mr Kuroda is that capital is mostly staying put within the bond market. While there has been talk of institutional investors such as life assurers reshuffling portfolios to increase exposure to foreign assets, analysts say that there is little evidence of any such shift so far.
Weak US and Chinese data this week provide further encouragement to bond investors to sit tight, notes Noriatsu Tanji, fixed-income strategist at Barclays in Tokyo.
Still, the BoJ’s nerves are obvious, says Yuya Yamashita, rates strategist at JPMorgan in Tokyo, noting that the bank has conducted seven straight days of operations to supply funds for up to one year at the overnight rate of 0.1 per cent, in spite of excess reserves at historical highs. This “huge” effort to stabilise rates at the short end is “highly unusual”, he says.
Many market participants, meanwhile, remain on the sidelines, with reduced trading volumes amplifying price swings “in a vicious, self-fulfilling cycle”, says Mr Ishii of Mitsubishi UFJ Morgan Stanley.
“More time will be needed before the market psychology can fully recover,” he says.
Since the new governor of the Bank of Japan shouldered his “big bazooka” two weeks ago, promising to buy up more government bonds than ever to drive down the cost of borrowing, yields have risen at every point along the country’s 30-year sovereign debt curve, prompting some banks to charge more for loans.
At the same time, trading volumes in Japanese government bonds – or JGBs – have collapsed, sending volatility to record highs and threatening the ability of the world’s most indebted government to keep funding itself at the world’s lowest rates.
An auction last week of 30-year bonds was “horrendous”, in the words of one strategist, with the widest ever spread between lowest and average bid prices providing evidence of shaky demand.
Traders and analysts say that some of the turmoil can be traced to the actions of a single large bank that took profits by dumping JGB holdings the day after Mr Kuroda’s debut, triggering similar sell-offs elsewhere.
But they argue that most of the blame should be laid at the door of the central bank, which has not done enough to lay out the full implications of this dramatic shift from the previous monetary easing regime.
Net annual asset purchases by the BoJ have risen to nearly 15 per cent of nominal gross domestic product, notes Nomura, making Mr Kuroda’s “new phase” of easing significantly bigger than any equivalent operation around the world.
Moreover, this is not ordinary QE but “qualitative and quantitative easing” in the BoJ’s terminology. As the central bank more than doubles its monthly bond purchases – mopping up about 70 per cent of new issuance from the government – it will also double the average maturity of its holdings to about seven years from three.
Amid the “shock and awe” of this radical policy shift, investors in Japan’s Y914tn ($9.4tn) government bond market, the world’s second-largest, have “lost their bearings”, says Naka Matsuzawa, chief Japan rates strategist at Nomura in Tokyo.
If volatility remains elevated for much longer, analysts warn that value-at-risk models may force investors to liquidate JGB holdings, pushing yields higher. That may mean that the BoJ finds it more difficult to create expectations of negative real rates – which are seen as essential to spur broad demand across Japan for loans and riskier assets.
“For now, the easing programme that was announced with such fanfare must be judged a failure,” says Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.
What happens this week could be vital in restoring order, analysts say.
On Wednesday afternoon, the BoJ will hold a special meeting with 30 JGB traders, aiming to flesh out some of the concerns raised in a get-together last week with more senior staff at financial institutions.
After that meeting, the BoJ said it would buy Y2.5tn of bonds with up to 10 years to maturity the following day, the first time it had given more than a few hours’ notice of any asset purchase. But some say that, in future, more detail on the timing and sizes of the BoJ’s Y7.5tn of monthly bond purchases will be needed, so that investors can get a better sense of supply and demand.
“The longer the schedule the BoJ can provide, the better,” says one senior Tokyo trader. “If you can see the next couple of months, of maybe the next quarter of buybacks, you can start to construct portfolios and offset what you’re going to be buying in auctions.”
Analysts will also be watching closely over the government’s auction of Y1.2tn of 20-year bonds on Thursday, which is the last super-long auction before the Golden Week holidays. If the spread of bids is much narrower than last week’s offering of 30-year bonds, volatility in the broader market should recede, says Takehito Yoshino, senior fund manager at Mizuho Trust & Banking.
For now, the good news for Mr Kuroda is that capital is mostly staying put within the bond market. While there has been talk of institutional investors such as life assurers reshuffling portfolios to increase exposure to foreign assets, analysts say that there is little evidence of any such shift so far.
Weak US and Chinese data this week provide further encouragement to bond investors to sit tight, notes Noriatsu Tanji, fixed-income strategist at Barclays in Tokyo.
“At this moment, investors will put up with the volatility,” says Tomohiro Miyasaka, director of fixed-income strategy at Credit Suisse in Tokyo.
Many market participants, meanwhile, remain on the sidelines, with reduced trading volumes amplifying price swings “in a vicious, self-fulfilling cycle”, says Mr Ishii of Mitsubishi UFJ Morgan Stanley.
“More time will be needed before the market psychology can fully recover,” he says.
Copyright The Financial Times Limited 2013.
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