TOKYO: Japanese government bond prices dropped on Monday, with the 10-year yield hitting one-month highs, as investors held off buying ahead of two bond auctions this week while trying to read the intentions of the Bank of Japan.
Although JGB yields hit record lows just after the BOJ unveiled its aggressive quantitative easing plan, bond prices have since given up all their gains as investors fretted over the inflationary aspect of the central bank's policy.
"Essentially we now have a national policy that says investors should buy risk assets by borrowing cheaply. So if you think interest rates will be higher two years from now, you would have some hesitation in buying anything longer than five years," said Hidenori Suezawa, chief fixed income strategist at SMBC Nikko Securities.
"Investors are trying to find out just how serious the authorities are about this," he said.
On Monday, the yield on the current 10-year JGB ticked up 2.5 basis points to 0.645 percent, and briefly rose to as high as 0.650 percent, its highest level in about a month.
The yield has been rising since it hit a record low of 0.315 percent on April 5, a day after the BOJ shocked markets with its unprecedented stimulus plan.
The BOJ has pledged to double its bond holdings in two years - a positive factor for bonds - which the central bank says will help it meet the goal of lifting inflation to 2 percent.
But the policy is a double-edged sword for bond investors as higher inflation undermines the real value of bonds and usually leads to higher bond yields, prompting some analysts to say the BOJ is trying to have its cake and eat it.
"The market simply cannot grasp what the BOJ is getting at," said Katsutoshi Inadome, fixed income analyst at Mitsubishi UFJ Morgan Stanley Securities.
"What's the BOJ's priority? Keeping rates low? Or boosting inflation to 2 percent? In which case buying five-year bonds yielding 0.2 percent would be a disaster," Inadome said.
On Monday, the five-year yield rose 1.0 basis point to 0.265 percent, though it is still off a one-year high of 0.320 percent hit last Thursday.
Uncertainty, and lack of confidence, on the BOJ's policy boosted volatility in the market, making it harder for investors to buy JGBs than it used to be.
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