BOJ seeks to fend off bond bears with third day of debt buying

The BOJ offered to buy unlimited amounts of two-year notes at a yield of 0.04%, and five-year debt at 0.24%. It also offered to purchase a total ¥700 billion ($5.3 billion) of one-to-10 year bonds, and ¥300 billion of 10-to-25 year debt. That’s in addition to a daily operation to buy unlimited quantities of 10-year securities and futures-linked securities at 0.5%.

The BOJ’s struggle to contain rising local yields may have a global consequence as investors in the nation own $2.4 trillion of foreign debt. Higher local yields may spur Japanese investors to bring home more funds, exacerbating upward pressures on bonds around the world.

“The ripples from the BOJ move continue to impact markets,” Martin Whetton, head of fixed income and currency strategy at Commonwealth Bank of Australia, wrote in a research note. “Hedge costs remain punitive. The yen could retrace, which leaves unhedged buyers out of pocket and the domestic yields of course are attractive.”

The 10-year bond extended gains after the operation was announced, with its yield falling 4.5 basis points to 0.41%. The yen strengthened 0.4% against the dollar even though efforts to cap bond yields are generally negative for the currency.

The BOJ has conducted a combination of unlimited and fixed-amount purchases targeting tenors of 10 years or less this week, and said Thursday it would provide banks with no-interest two-year loans next week. The operations came after the BOJ doubled the ceiling of the 10-year yield to 0.5% earlier this month to help improve the market’s functioning.

Friday’s announcements increase the amount of debt the BOJ is buying this month to ¥17 trillion, surpassing the previous record set in June.

The BOJ may surprise markets again by tightening monetary policy as soon as next month, Eisuke Sakakibara, a professor at Aoyama Gakuin University in Tokyo and a former vice finance minister, said in an interview with Bloomberg Television last week.

The BOJ’s decision to raise the 10-year yield ceiling was meant to improve market functioning, but the move sparked a selloff in debt, requiring even more debt purchases and threatening to reduce liquidity further.

Japan’s core inflation gauge is climbing at the fastest pace in four decades, putting further pressure on policy makers.

“Honestly, I don’t understand the BOJ’s intention,” Kazuhiko Sano, a three-decade bond veteran and the chief bond strategist at Tokai Tokyo Securities Co., wrote in a note. “The wider trading band is only fanning speculation of more policy changes and increased bond purchases risk reducing market liquidity even further.”

The BOJ conducts two kinds of bond-buying operations, one with a fixed yield and the other for a fixed amount. In the former it buys an unlimited quantity of debt at a predetermined yield. In the latter, it purchases a fixed amount of bonds at the prevailing market yield.

This story has been published from a wire agency feed without modifications to the text.