JGBs firm as market ponders ramification of BOJ policy switch

TOKYO, Sept 23 (Reuters) - Japanese government bonds firmed on Friday, as investors pondered the impact of the Bank of Japan's move this week to target interest rates on Japanese government bonds as the main tool of its massive monetary easing program.

The Ministry of Finance conducted a regular liquidity-enhancing auction, in which it re-offers previously issued 20- and 30-year bonds, and results were better than some investors had feared, according to market participants.

On Wednesday, ahead of a public holiday on Thursday, Japan's central bank dropped its previous target of increasing base money, and instead made a shift to exert unprecedented control of the bond market. It is now targeting to keep the 10-year bond yield around zero percent as it rebooted its stimulus framework.

The BOJ's announcement initially sent the benchmark 10-year JGB yield as high as 0.005 percent, into positive territory for the first time since mid-March. On Friday, the 10-year yield shed 2.5 basis points to minus 0.055 percent.

"I think the BOJ doesn't mind if the 10-year yield falls below zero. Of course they don't want it trading at negative 30 basis points again, but I think they don't mind the 10-year yield trading at shallow negative rates," said Naomi Muguruma, senior strategist, Mitsubishi UFJ Morgan Stanley Securities.

The 20-year JGB yield slipped 4 basis points to 0.375 percent, while the 30-year yield shed 4 basis points to 0.470 percent, though both were off session lows of 0.360 percent and 0.450 percent respectively.

The BOJ says that by directly targeting short- and long-term rates, it can more efficiently reduce borrowing costs while allowing for a rise in super-long yields, which would help lift investment returns. However, some strategists said such a policy is easier said than done.

"It will have a tough time keeping the long end steep when inflation expectations are low," said Neale Vincent, strategist at Nomura Securities.

"With 10-year rates likely to be very stable, the central bank may find that private-sector investors will be happy to take down the bulk of the over-10-year supply," he said.

The two-year JGB bucked the trend, its yield adding 1.0 basis point to minus 0.220 percent, as the BOJ opted to hold interest rates steady this week instead of taking short-term interest rates deeper into negative levels as some investors had expected.

December 10-year futures ended up 0.27 point at 151.76.

(Reporting by Tokyo markets team; Editing by Shri Navaratnam)

We encourage respectful comments but reserve the right to delete anything that doesn't contribute to an engaging dialogue
Help us moderate this thread by flagging comments that violate our guidelines
Help us learn more about Philly.com commenters. Click here to take this quick survey.

Comment policy:

Philly.com comments are intended to be civil, friendly conversations. Please treat other participants with respect and in a way that you would want to be treated. You are responsible for what you say. And please, stay on topic. If you see an objectionable post, please report it to us using the "Report Abuse" option.

Please note that comments are monitored by Philly.com staff. We reserve the right at all times to remove any information or materials that are unlawful, threatening, abusive, libelous, defamatory, obscene, vulgar, pornographic, profane, indecent or otherwise objectionable. Personal attacks, especially on other participants, are not permitted. We reserve the right to permanently block any user who violates these terms and conditions.

Additionally comments that are long, have multiple paragraph breaks, include code, or include hyperlinks may not be posted.

Load comments
Continue Reading