BOJ keeps 10 year yield pinned down but 5-yr jumps amid overseas yield surge

TOKYO: Japanese government bond yields surged sharply on Tuesday, tracking moves in global peers, forcing the Bank of Japan to step into the market to try and calm them down.

The five-year yield surged as high as 0.075%, a level not seen since September 2015, in the Tokyo morning before the central bank announced an additional bond purchase operation for Wednesday.

The two-year yield jumped as high as -0.04% for the first time since early April, the 20-year yield hit 0.93%, a high since January 2016, and the 30-year jumped to 1.28%, also a six-year peak.

The 10-year note hadn’t traded before the BOJ’s announcement, but changed hands shortly after with the yield flat at 0.25%, the top of the central bank’s 25 basis point tolerance band around the target rate of zero.

Overnight, 10-year Treasury yields pushed to the highest since 2011 and two-year yields scaled 2007 peaks as red-hot inflation spurred bets for even bigger step increases in US rates, with markets increasingly pricing in a 75-basis point hike for Wednesday.

Japan 10-year JGB yields breach BOJ’s upper limit

The BOJ’s announcement that it would offer to buy an additional 300 billion yen of bonds on top of the previously announced 500 billion yen operation had mixed success in suppressing yields outside the benchmark 10-year note, though.

As of 0630 GMT, the five-year was back at 0.075% after a brief dip to 0.045%, which was still a basis point higher than the previous day. The 20-year yield was 1.5 basis points higher at 0.870%.

However, two- and 30-year yields each were down half a basis point at -0.060% and 1.175%, respectively. Benchmark 10-year JGB futures ended the day down 0.91 point at 147.59, giving up their initial pop after the bond-buying announcement.

“There is a problem because the BOJ targets the 10-year, so other maturities, especially the super-long maturities, are being sold, and that is skewing the shape of the yield curve in Japan,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management.

The reason the BOJ has had success in controlling the 10-year yield despite a sharp rise in overseas yields is that most of the bond’s investors are Japanese, and share the view that beyond imported inflation, price pressures remain low in the country, Kichikawa said.

“There is very little for the BOJ to do except keep their current ultra-easy monetary policy, and continue their efforts to keep long-term yields low by intervening in the JGB market.”