TyB
Risk of Japan interest rate spike increases as BOJ softens grip
The Bank of Japan has begun loosening its long-lived tight control over the nation's bond market, gradually allowing the private-sector to determine prices. But the issuance of government bonds will not subside, creating the risk of an unexpected increase in interest rates during this transition.
Just after the BOJ recast its short- and long-term interest rate operations known as yield curve control on Thursday, there was an auction for 10-year Japanese government bonds, the yield on which serves as a benchmark for long-term interest rates. The results were a safe start, with the highest bid yield of 0.915%, in line with market expectations.
There is a reason for this. The BOJ had notified market participants that it would purchase JGBs on Monday, the business day following the auction.This provided a safety net for securities firms and other traders to feel secure in their bids. If successful bidders for the JGBs could not sell them to investors, they could sell them to the BOJ if the need arose. In a word, the recent bidding has been stomach churning. With a large supply of JGBs in the market, it would be difficult to absorb new issuance at low interest rates without the BOJ," said one bond trader.
Prior to 2013 when the BOJ embarked on its ultra-loose, unconventional monetary policy, the annual market issuance of JGBs was about 150 trillion yen ($1 trillion). That skyrocketed to the 200 trillion-yen level in fiscal year 2020 during the COVID pandemic. In fiscal year 2023, the amount has only slightly decreased to about 190 trillion yen.
For now, the BOJ is expected to absorb about 60% of new issuancesand "maintain this ratio for the time being," said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management.
However, if the BOJ were to move toward full-scale tightening, (NEBER GONNA HABBEN…at least officially) this ratio would be expected to gradually decline. With the loss of a generous investor in the form of the BOJ that is indifferent to prices, the risk of a sharp rise in interest rates increases.
To get an idea of how much risk is involved, consider how much the BOJ has suppressed interest rates. One measure that can be used to estimate this is the "term premium." It refers to the additional interest rate that investors demand as compensation for the risk of holding government bonds for a long period of time.
The long-term rate is considered to be the sum of the potential growth rate and the expected inflation rate, plus the term. The BOJ's government bond purchases have crushed that premium, pushing the long-term rate down by about 1.1 percentage points.
If the term premium were to return to zero, the long-term rate would be expected to rise to about 2.1%. In fact, in the U.S., the term premium has risen from negative to positive territory on fiscal concerns. The main reason for the sharp increase in U.S. long-term rates has been the jump in the term premium (and the sovs dumping longer term US Debt….they never mention this if they can get away with it)
The Fed is in the process of implementing quantitative tightening that will reduce its holdings of government bonds (believe wut you want here ass tons of Securities Lending goes on daily via the NY FED). But it is not realistic to expect the BOJ to reduce its total JGB holdings in the same way.
However, the possibility of a slowdown in government bond purchases remains. This is because the BOJ is shifting its focus to the level of interest rates rather than the volume of JGB purchases. In that case, "the amount of government debt supplied to the market will increase.
The leading underwriters taking the place of the BOJ are players such as private banks and others. Depository institutions have reduced their holdings of government bonds from about 320 trillion yen to about 90 trillion yen over the past decade, holding less than 10% of the total. As a result, they are expected to have a large capacity to buy government bonds.(Or they are gearing up to pump an ass ton of money into China…cuz they need it or not like they haven’t done that before)
https://asia.nikkei.com/Business/Markets/Bonds/Risk-of-Japan-interest-rate-spike-increases-as-BOJ-softens-grip
https://tradingeconomics.com/japan/government-bond-yield
https://tradingeconomics.com/japan/currency
From 2 days ago
Japan’s Fading Rally Drives Some Investors to ‘Cheap’ China Shares
https://www.msn.com/en-us/money/markets/japan-s-fading-rally-drives-some-investors-to-cheap-china-shares/ar-AA1jmcXw