Traders betting that the Bank of Japan’s ultra-easy monetary policy will be unsustainable have been blamed for the steepest plunge in government bond futures in years.
The downward pressure came as the monetary authority announced additional buying, leaving yields clinging to the upper limit of the central bank’s policy band.
The 10-year yield held at 0.25% as of 0727 GMT, despite dipping to 0.23% in the morning after the BOJ expanded its buying operations to additional issues of the note.
“It bears the look of selling targeted at testing the BOJ’s policy resolve,” said Katsutoshi Inadome, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities.
The BOJ later announced additional purchases of the securities for Thursday and Friday, and reiterated it would continue to conduct additional operations based on market moves. It did not move the yield from the top of the bank’s tolerance band, 25 basis points either side of zero.
Benchmark 10-year JGB futures, which had opened lower, turned positive briefly after the central bank’s initial announcement, then plunged sharply to close at the low of the day at 145.58, a level not seen since late 2014. The heavy selling triggered a circuit breaker at the exchange.
Traders say speculators betting on a BOJ capitulation amid tightening at other global central banks have been attacking futures along with parts of the cash bond curve.
The BOJ said on Wednesday that strong selling of seven-year JGBs threatened to push the 10-year yield above its policy band.
Seven-year yields hit a seven-year low of 0.35% at one point, as traders bet on the bonds with the strongest link to 10-year futures in a market heavily owned by the BOJ.
The BOJ meets on Friday and is widely expected to stick to its yield-curve-control policy, even as global markets sell off ahead of a Fed meeting on Wednesday at which bank analysts expect as much as 75 basis points of tightening.
Bank of Japan’s Bond Buying
Yields on shorter JGB tenors pulled back in the face of the BOJ’s escalating bond buying, but they jumped in the super-long sector.
The 20-year yield added 7 basis points to 0.940%, the highest since early 2016. The 30-year yield soared 8 basis points to 1.255%.
Two-year yields eased 1 basis point to -0.065%, while five-year yield, which had come under significant upward pressure this week, edged back half a basis point to 0.070%.
“Shorting JGBs in the hope that yields would spike has been known for over two decades as a ‘widow-making’ trade,” John Vail, chief global strategist at Nikko Asset Management in Tokyo, wrote in a client note.
“While there certainly has been some profit in shorting the very long end of the curve, both historically and in recent months, taking on the firepower of the Bank of Japan, especially as it is led by the very strong-willed Governor Kuroda, will not likely end well.”
- Reuters with additional editing by Sean O’Meara