Analysis: Japan government-bond selloff sparks fears of too much, too fast

Tue May 14, 2013 3:37pm EDT
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By Lisa Twaronite

TOKYO (Reuters) - A three-day rout in the bond market has raised concerns that the Bank of Japan is getting more than it bargained for, by prodding investors to shift money out of the safety of government bonds faster than the government expected.

As prices have slid, the yield on the benchmark 10-year bond has jumped to an eight-month high. While still very low by historical standards, the interest rate is almost triple the record low it briefly plumbed in April after the BOJ unleashed an enormous monetary easing aimed at ending 15 years of deflation and getting the sluggish economy moving.

The Japanese government bond market has defied decades of predictions that it was a bubble waiting to burst. Most strategists believe JGBs will continue to avoid the worst case -- a rush for the exits that could send the government's borrowing costs so high it could no longer service a debt that, at some 230 percent of GDP, is the worst among industrial economies.

But the sell-off that began on Friday still carries potentially major headaches, from the Finance Ministry's debt management to the BOJ's handling of its massive asset purchases, to a rise in mortgage costs in an economy that is just beginning to show signs of life.

"The BOJ is trying to keep rates low enough so that investors don't buy them, but obviously they would prefer a gentle squeeze as opposed to the current scramble," said Neale Vincent, strategist at Nomura Securities in Tokyo.

JGB yields had remained remarkably low in recent months, even as Tokyo stocks have soared and the yen has slid on Prime Minister Shinzo Abe's plans to reflate the world's third-biggest economy.

The 10-year yield rose as high as 0.855 percent on Tuesday, its highest since mid-August and more than 50 basis points above the April record low of 0.315 percent. It has spiked about a quarter of a percentage point in the past three sessions. Before the BOJ's April 4 "quantitative and qualitative easing," the 10-year bond yielded around 0.55 percent.

The benchmark 10-year bond futures contract ended down 0.84 point on Tuesday at 142.11, after dropping to a session low of 141.95, its deepest nadir since early April 2012.   Continued...

A man takes pictures in front of the Bank of Japan building in Tokyo, March 29, 2013. REUTERS/Yuya Shino