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15 May 2013
Forex Flash: Japanese government bonds have continued to sell off sharply - BBH
FXstreet.com (Barcelona) - Brown Brothers Harriman analysts note that Japanese government bonds have continued to sell off sharply.
They begin by noting that the 10-year yield jumped 11 bp to 0.86% and last Tuesday, after Japanese markets reopened from the Golden Week holidays, the 10-year yield was below 0.60%. They see that the yield now stands at its highest level since last June while reports suggest banks and funds are the main sellers. They believe that if this volatility is sustained, it risks a response by Japanese officials. The BOJ has reportedly already changed its tactics in terms of its asset purchases in line with what the dealers suggested, and this seemed to work for a little bit.
Overall, they feel that the dramatic rise in yields can has several repercussions. First, it would seem to run counter to the declared purpose of the aggressive monetary policy and, “A gradual increase in interest rates as inflation expectations increase is one thing, a 50% increase in the yield over three days is a completely different kettle of fish.” Second, they feel that while US yields have also risen recently, the backing up in Japanese rates has been even more striking and this has resulted in a sharp compression in the spread. They write, “Now around 104 bp, it is at the lower end this year's range.” Third, they note that the rise in domestic yields may deter life insurance companies and other institutional investors from aggressively implementing this year's international allocations. Fourth and finally, they feel that these considerations saw the dollar pullback to about JPY101.25 were good bids were found and additional support is seen near JPY100.80.
They begin by noting that the 10-year yield jumped 11 bp to 0.86% and last Tuesday, after Japanese markets reopened from the Golden Week holidays, the 10-year yield was below 0.60%. They see that the yield now stands at its highest level since last June while reports suggest banks and funds are the main sellers. They believe that if this volatility is sustained, it risks a response by Japanese officials. The BOJ has reportedly already changed its tactics in terms of its asset purchases in line with what the dealers suggested, and this seemed to work for a little bit.
Overall, they feel that the dramatic rise in yields can has several repercussions. First, it would seem to run counter to the declared purpose of the aggressive monetary policy and, “A gradual increase in interest rates as inflation expectations increase is one thing, a 50% increase in the yield over three days is a completely different kettle of fish.” Second, they feel that while US yields have also risen recently, the backing up in Japanese rates has been even more striking and this has resulted in a sharp compression in the spread. They write, “Now around 104 bp, it is at the lower end this year's range.” Third, they note that the rise in domestic yields may deter life insurance companies and other institutional investors from aggressively implementing this year's international allocations. Fourth and finally, they feel that these considerations saw the dollar pullback to about JPY101.25 were good bids were found and additional support is seen near JPY100.80.