Japan's 10-year JGB yield rises as market assesses GPIF's potential allocation shift

TOKYO: Japan’s 10-year government bond (JGB) yield reversed course and rose on Monday as the market assessed the impact of a potential shift in the Government Pension Investment Fund’s (GPIF) investment strategy.

The benchmark 10-year JGB yield rose 3 basis points (bps) to 2.79%, after falling to as low as 2.735% earlier in the session. Yields move inversely to bond prices.

The yield on 10-year bonds fell 17 bps on Friday as bond sentiment was boosted after Finance Minister Satsuki Katayama said the government would explore measures to encourage the GPIF to increase investments in domestic financial assets.

“The market overreacted to Katayama’s comments,” said Rinto Maruyama, senior strategist at FX and rates at SMBC Nikko Securities.

“Traders scooped up the bonds on Friday as they were looking for a cue to buy back JGBs whose prices fell sharply throughout the week,” he added.

The JGBs were sold after the government unveiled an economic blueprint last month, as fears for spending and doubts about the Bank of Japan’s ability to tighten monetary policy grew.

On Monday, the market assessed the impact of the GPIF’s potential shift in allocations, Maruyama said. Under the current framework, the GPIF could increase its allocation to domestic bonds by up to 12.26 trillion yen ($75.70 billion).

If 70% of it is allocated to 10-year JGBs and spent over three years, that would push down the yield of 10-year bonds as much as 7 bps, Maruyama said.

If other investors follow the GPIF’s lead, the 10-year bond yield could fall by as much as 20 bps, he added.

But given that nothing has been decided on the move, the reaction on Friday was too much, Maruyama said.

The GPIF currently maintains roughly equal allocations to domestic equities, foreign equities, domestic bonds and foreign bonds.

The five-year yield rose 1.5 bps to 1.995%.