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Yield Curve in Japan Keeps Steepening With BOJ Holding Back

Masaki Kondo
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Yield Curve in Japan Keeps Steepening With BOJ Holding Back

(Bloomberg) -- An incessant steepening in Japan’s yield curve is raising the stakes for the central bank’s monthly bond-buying plan due Tuesday.

Faced with mounting losses on their portfolios, investors are looking to the Bank of Japan to boost purchases of super-long debt to ease the pressure. The spread between 10-year and 30-year yields widened for a third month in June in the longest run of bear steepening since September 2018.

Japan’s bond market has come under pressure after the finance ministry increased planned issuance by 60 trillion yen ($560 billion) for the fiscal year ending March 2021 to fund stimulus spending. The impact has been compounded by reduced purchases of super longs by the central bank.

“The bond market at first calmly received the unprecedented increase in bond issuance,” Jun Ishii, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities Co., wrote in a June 25 note. “But, it has finally started to become concerned about absorbing it. Bear-steepening of the yield curve is reflecting such sentiment.”

The BOJ has gradually reduced purchases of super longs, partly to mitigate the side-effects of prolonged quantitative easing. It bought 302.4 billion yen of debt due in more than 10 years last month, compared with 1.6 trillion yen in September 2016 when it first introduced its yield-curve control policy.

The BOJ’s yield curve control policy has blazed a trail that other major central banks are now warming up to in the wake of the coronavirus crisis -- so its ability to keep the back end of the market in abeyance as issuance rises may draw international interest.

BOJ Governor Haruhiko Kuroda said on June 16 Japan’s super-long yields weren’t high compared with that of other nations. The central bank is scheduled to release its bond-purchase plan at 5 p.m. Tokyo time on June 30.

“The BOJ doesn’t seem to want to boost purchases of super-long maturities by a lot, as suggested by Kuroda,” said Takenobu Nakashima, senior rates strategist at Nomura Securities Co. “Markets aren’t really expecting a huge increase in these zones.”

For traders, the opportunity may lie in different parts of the curve.

Morgan Stanley MUFG Securities Co. sees banks buying more 20-year bonds as an increase in fiscal spending results in large deposit inflows while “massive supply” will emerge in the short end, strategist Koichi Sugisaki wrote in a note. As such, investors can profit from betting on the curve flattening between the five-year and 20-year sectors, he wrote.

(Adds background on BOJ policy in sixth paragraph)

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