It Took a Record $81 Billion Bond Buy for BOJ to Restore Calm

(Bloomberg) — Tokyo’s bond market began the week on a much calmer footing as traders mulled unprecedented intervention by the Bank of Japan, which dragged benchmark yields back below their closely watched ceiling.

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Ten-year yields edged higher to 0.23% Monday in the aftermath of the BOJ’s 10.9 trillion yen ($81 billion) of government bond purchases last week, the most on record, data compiled by Bloomberg show. The central bank ramped up bond buying as benchmark yields breached its 0.25% tolerated limit amid a global debt selloff.

By way of comparison, European Central Bank asset purchases under its so-called APP program averaged about $27 billion — per month — this year through May.

Market watchers see the calm as temporary as the BOJ continues to defy an intensifying global wave of central bank tightening and concentrated market pressure on the yen and government bonds. Treasuries are closed for the Juneteenth holiday Monday, but remain a key driver as does the direction of the dollar-yen, hovering around a 24-year low.

“If the yen weakens further as a sell-off in foreign bonds resumes, it would not be surprising were the yen rates market to start testing the BOJ again,” wrote Citigroup Inc. strategist Tomohisa Fujiki in a note.

Implied volatility for 10-year JGBs eased after rising to the highest since the global financial crisis in 2008 on Friday. The BOJ said Friday its bond buying will continue for an extended period of time.

“Since the JGB market volatility has been initiated by the global reaction to US CPI and the Federal Reserve’s tightening, the structure keeping it unstable remains quite intact,” said Mari Iwashita, chief market economist at Daiwa Securities. “Even as the BOJ steps up efforts to defend its turf, the structure behind the challenges remain the same.”

Speculative attacks on Japan’s bond market have mounted amid bets the BOJ will cave in to pressure and tweak its increasingly isolated easy monetary policy — something it reconfirmed at its policy decision Friday. But the impact of the central bank’s bond purchases have squeezed some corners of the futures markets, putting at least some arbitrage traders under pressure.

Basis Trade Blowup Adds New Drama to BOJ Fight With Bond Market

Meanwhile, the appointment of a Japanese government bond expert with experience of the market turmoil of the late 1990s to a key role in the Finance Ministry has caught the attention of market watchers in Tokyo. Michio Saito — dubbed “Mr. JGB” — will head up a division that covers the bond market and may strengthen lines of communication with the central bank, according to some strategists.

For the BOJ to seek a smooth exit from massive bond purchases, close cooperation with the finance ministry is essential, so the appointment of an experienced person in charge is very significant, Iwashita said. This “is positive news for the market,” she said.

(Updates prices, adds story links.)

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