Japan Bond Market Braces for Turbulence as Investors Dump Holdings at Discount
Tokyo, Japan – A growing sense of desperation is gripping the Japanese government bond (JGB) market, with investors now willing to sell their holdings at a discount to the Bank of Japan (BOJ), a highly unusual move signaling important underlying anxieties. This unprecedented behavior,observed in recent BOJ bond-buying operations,points to a potential turning point in Japan’s decades-long era of ultra-low interest rates.
Recent BOJ operations on August 14th and 20th revealed a striking anomaly: the lowest accepted yield matched the average accepted yield. Typically, bondholders aim for the highest possible price, resulting in lower yields. The convergence of these yields indicates a rush to offload bonds, with investors accepting less favorable terms to exit their positions.
“It’s hard to determine if this is due to position adjustments, expectations of higher BOJ rates, or both,” explains Shoki Omori, Chief Desk strategist at Mizuho Securities Co. in Tokyo. “There is a possibility overseas investors sold due to concerns over a slump in long-term bonds.”
Analysts suggest that a concentrated sell-off of ¥350 billion in JGBs with maturities between five and ten years overwhelmed the BOJ’s purchase quota, forcing remaining investors to liquidate holdings in the secondary market. This hasn’t been seen in a decade, mirroring conditions just before long-term yields plummeted into negative territory as the BOJ aggressively pursued monetary easing to combat deflation. For the first time since 2013, the average and lowest yields have converged in back-to-back operations.
Yields surge to Multi-Decade Highs
the fallout from this selling pressure is already evident. Benchmark 10-year JGB yields have climbed to their highest levels since 2008, while super-long debt yields have reached heights not seen since 1999. Forecasts predict further increases, fueled by growing concerns over persistent inflation, a potential shift in the BOJ’s monetary policy, and increased government spending.
This sell-off is occurring as the BOJ itself begins to trim its massive balance sheet and reduce its bond purchases - a significant policy shift after years of quantitative easing. However, other potential buyers are stepping back. Mitsubishi UFJ Financial Group, Japan’s largest bank, slashed its JGB holdings by 27% between March and the end of June. Life insurers are also actively reducing their exposure to JGBs, burdened by unrealized losses.
Rate Hike Expectations Intensify
The market is increasingly pricing in a potential interest rate hike by the BOJ. Traders now assign a roughly 70% probability of a rate increase by the end of December, up from 60% at the beginning of August, as reflected in overnight index swaps.
Tadashi Matsukawa, Head of Bond Investments at PineBridge Investments Japan Co.,attributes the strong selling pressure to these heightened expectations of a BOJ rate hike.
All eyes will be on the BOJ’s next operation on August 27th,focused on purchasing five- to 10-year debt,to gauge whether the current selling frenzy will continue. The outcome will provide crucial insight into the future trajectory of Japan’s bond market and the potential for a broader shift in the nation’s economic landscape.
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