Join +750K new investors every month who copy stock picks from billionaire's portfoliosSign Up Free

Fighting Against the Bank of Japan May Not Be Crazy After All

Published 03/10/2019, 20:00
Updated 03/10/2019, 21:36
Fighting Against the Bank of Japan May Not Be Crazy After All
BNPP
-
MS
-

(Bloomberg) -- Going against a central bank is an investment strategy fraught with peril, but some bond market analysts think the Bank of Japan will fail to steepen the yield curve.

The analysts argue that the BOJ’s toolkit is designed to push down yields, rather than lift them. And even if the central bank succeeds for a time, as it did this week, a tide of money seeking yields in a slowing global economy will prove stronger.

“We usually say, ‘Don’t fight the BOJ!’, but this time I think it works to go against them,” said Koichi Sugisaki, a strategist at Morgan Stanley (NYSE:MS) MUFG Securities Co. in Tokyo. Sugisaki points to how Japanese institutions are waiting to snap up bonds with maturities of 20 years or more whenever yields climb.

The BOJ may be the only major central bank trying to actively fight a global collapse in bond yields that has already seen benchmark Treasury rates more than halve in the past year. It signaled deep cuts in bond purchases for October, and indicated it may even stop buying debt of more than 25 years -- a big step for a central bank that pioneered ultra-loose monetary policy.

Read more: BOJ Signals Deep Cuts to to Steepen Yield Curve

In the six-and-a-half years since Governor Haruhiko Kuroda launched his monetary campaign, the central bank has boosted its holdings of JGBs five-fold to about 470 trillion yen ($4.4 trillion). It has drained almost half of the supply in the market, creating what the BOJ calls a “stock effect” that acts to suppress yields. Cutting weekly purchases, which is about affecting “flows”, may have less impact on how yields behave, according to Nomura Securities Co.

“The stock impact has been strengthening,” said Takenobu Nakashima, a senior rates strategist at Nomura in Tokyo, who pointed to a 2018 research paper from the BOJ that indicated its massive JGB holdings accounted for 90% of the move in yields during a period it studied.

In the past month, as the central bank steadily cut bond purchases, the 10-year yield has climbed about 7 basis points. The impact has been more pronounced for debt maturing in 30 years, with an advance of about 20 basis points.

Yusuke Ikawa, Japan strategist at BNP Paribas (PA:BNPP) Securities in Tokyo, is also skeptical that the steepening will last. “It will be difficult to halt a bull-flattening if overseas yields resume their decline,” said Ikawa.

The BOJ’s seeming success has taken place amid a pause in the global bond rally, with Treasury yields rebounding in September. History may be against the Japanese central bank, too. For all the money it has spent, it hasn’t engineered significant change in rates since shifting its policy emphasis to yield-curve control on 2016.

To be sure, analysts agree that yields would be even lower if the BOJ didn’t slow the pace of purchases.

Its October bond market plan announced earlier this week slashed the purchase ranges for four major maturities zones and indicated it could skip some buying operations.

Investors will get their first taste on Friday of how the plan plays out, with the central bank scheduled to purchase bonds in the 5-10 year maturities zone.

Future monthly bond plans could be tweaked to adjust the boundaries of the maturities zones and the BOJ could also state that it won’t accept offers below certain yield levels, according to analysts.

Click here to see a comparison of the October and September plans

The elephant in the room for the BOJ is what it will ultimately do with its huge hoard of JGBs.

Analysts see the outright sale of bonds by the central bank as unrealistic for now, because it would contradict the broader policy of expanding the monetary base -- and could spur a rally in the yen, which would hurt exporters and efforts to boost inflation.

Market speculation is also rife that the BOJ may cut its short-term policy interest rate -- currently set at minus 0.1% -- even further into negative territory at its next board gathering on Oct. 30-31.

One big risk of doing this, according to analysts, is that instead of steepening the yield curve, it could pull down rates in general.

“It would be contradictory to lower the negative rate and want to prevent long- and super-long yields from falling too much,” said Nakashima.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.