Investors are getting so desperate to lighten their holdings of Japanese government bonds that some are willing to sell the securities at a discount to the central bank.
At the Bank of Japan’s regularly scheduled bond buying operation on Aug. 14 and Aug. 20, something unusual happened: the operations’ lowest accepted yield matched the accepted average.
That’s rare because bondholders usually try to sell securities at the highest price possible, resulting in a lower yield. But in this case, the lowest yield has climbed to levels in line with the average, suggesting the price is cheap.
It’s an indication that some investors made lopsided offers to sell ¥350 billion of domestic sovereign debt with five to 10 years to maturity. The purchase quota was completely filled by a few large-scale sales, forcing others to offload debt in the secondary market, according to analysts.
The last time such an anomaly happened was a decade ago, just before long-term yields bottomed out below zero as the BOJ embarked on radical monetary easing to try to drag the economy out of deflation. This month, average and lowest yields merged at back-to-back operations for the first time since 2013.
“It’s hard to determine if this is due to position adjustments, expectations of higher BOJ rates, or both,” said 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.”
Since the latest operations, benchmark 10-year yields have climbed to the highest since 2008 and rates on so-called super long debt have reached levels unseen since 1999. Yields are forecast to go even higher, with concerns growing over inflation, tighter monetary policy and fiscal expansion.
The selloff comes as the BOJ, which owns more than half of the nation’s sovereign notes, moves forward with its plan to trim its balance sheet and scale back bond purchases.
Other buyers are failing to fill the gap. Mitsubishi UFJ Financial Group Inc., Japan’s largest bank, reduced holdings of domestic government bonds by 27% from March to the end of June. Life insurers are also proceeding with the disposal of sovereign notes that have incurred unrealized losses.
Tadashi Matsukawa, head of bond investments at PineBridge Investments Japan Co., said that the strong selling pressure is due to heightened expectations of a BOJ rate hike. Traders see about a 70% chance of an increase by the end of December, as reflected by movements in the overnight index swaps, compared with a 60% likelihood at the start of August.
With no auctions of long-term government bonds scheduled this week, the BOJ’s operation on Aug. 27 to buy five- to 10-year debt will be closely watched by market participants to see if the selling continues.
This article was generated from an automated news agency feed without modifications to text.
