World Economy

Helter-Skelter Ride for JGBs

Helter-Skelter Ride for JGBsHelter-Skelter Ride for JGBs

The latest move to negative rates by the BOJ and uncertainty about whether it will cut them further has definitively created one thing: volatility.

While all eyes this week have been on the European Central Bank’s decision on monetary policy, next week’s focus will be on the equivalent decision by the Bank of Japan, and growing uncertainty about it has already provoked extraordinary volatility in Japanese government bonds, NewsMarket reported.

Currently, yields on the benchmark government debt issues in Japan are negative from three months all the way up to 10 years but buyers and sellers have been on a helter-skelter ride, provoked in part by a Reuters report that the BOJ is to hold off cutting interest rates at its review on Monday and Tuesday as it scrambles to soothe market jitters caused by January’s surprise decision to adopt negative interest rates.

One thing is certain: the latest move to negative rates from the BOJ, and the specter that it will continue deeper, or not, has definitively created one thing: volatility,” writes John Briggs, head of strategy, Americas, at Royal Bank of Scotland.

Thirty-year JGBs fell by 22 basis points on Tuesday from 0.685% to 0.468%, and rose by 24bps on Wednesday to 0.709%, giving back all their historic gains and then some, he notes. “I believe it is telling that quantitative easing, which for a long time was a volatility suppressor, has been replaced by negative rates as the leading policy choice, which is inducing volatility in rates, currencies, and equities–particularly financials,” Briggs writes.

He notes suggestions that low JGB 30-year yields will pull down the US and other government bonds on a relative value basis but reckons that if Japanese investors are rejecting the idea that 30-year JGBs are sustainable at the low levels seen, that basis or argument is for now unsustainable.

Meanwhile, 80% of analysts see a further cut to the negative rate as the most likely action for Gov. Haruhiko Kuroda, and almost 90% see more easing coming at one of the four meetings through the end of July. Only five of 40 economists expect additional stimulus at the meeting ending Tuesday, according to the survey by Bloomberg.

Japanese Finance Minister Taro Aso said on Friday he hoped the Bank of Japan would continue its efforts to achieve its 2% price target, while suggesting that specific monetary policy steps were up to the central bank to decide.

The adoption of negative interest rates by the BOJ is already having an impact such as bringing down housing loan rates, Aso told reporters after a cabinet meeting.

The BOJ is set to hold off cutting interest rates at next week’s rate review, sources said, as it scrambles to soothe market jitters caused by January’s surprise decision to adopt negative rates.