TOKYO: Japanese government bonds firmed and the yield curve steepened on Thursday, after the Bank of Japan unexpectedly announced its first special fixed-rate buying operation under its revamped monetary policy framework.
The benchmark 10-year yield, which rose to a nine-month high of 0.035 percent on Wednesday, was down 1 basis point (bp) at 0.005 percent. It earlier rose as high as 0.025 percent before skidding after the BOJ's offer.
Under its current monetary policy scheme outlined in September, the BOJ adopted a strategy of JGB yield curve control, under which it will guide the benchmark 10-year yield to around zero percent.
"Before today, a lot of people didn't know what a fixed-rate operation was - including me. We thought they would come in to buy 10-year JGBs at zero percent," said Tadashi Matsukawa, head of fixed income investment at PineBridge Investments in Tokyo.
The BOJ offered to buy an unlimited amount of JGBs with 1 to 3 years to maturity at a yield of 0.020 percent above their previous close. It also offered to purchase an unlimited amount of JGBs with 3 to 5 years to maturity at 0.019 percent above their previous close.
The offer attracted no bids at those levels, as investors can sell JGBs at lower yields in the market, though the BOJ's announcement seemed to have achieved its aim of pushing down yields of shorter maturities.
The two-year yield shed 5 bps to minus 0.160 percent and the five-year yield was down 4 bps at minus 0.100 percent.
"The 5-year sector is really key for the market because what if the 5-year moved above zero percent? It would be very difficult for the BOJ to control the 10-year at zero percent," said Matsukawa. "So it was necessary for the BOJ to keep the 5-year yield negative."
JGB yields rose to multi-month highs in recent sessions, tracking upward moves in U.S. Treasury notes, on expectations the administration of President-elect Donald Trump will embark on reflationary policies.
BOJ Governor Haruhiko Kuroda told the upper house financial affairs committee that the central bank does not have to accept gains in JGB yields simply because U.S. Treasury yields are rising.
December 10-year JGB futures ended up 0.29 point at 150.71. They moved off a session low of 150.28, their lowest since January, to surge as high as 150.82 after the BOJ's announcement.
Results of a 20-year JGB auction on Thursday underscored investor's wariness to buy bonds against the current backdrop of rising global yields.
The Ministry of Finance conducted sale of 1.1 trillion yen ($10.08 billion) of 20-year JGBs with a 0.5 percent coupon produced a lowest price of 100.400, with 71.3080 percent of the bids accepted at the lowest price.
The sale drew bids of 3.17 times the amount offered, down from the previous sale's bid-to-cover ratio of 3.49 times. The tail between the average and lowest accepted prices also widened to 0.40, up sharply from the previous sale's 0.07 and at its widest in seven months, indicating weaker demand for the bonds.
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