A Jump in Bond Yields Gives the Bank of Japan Some Relief

(Bloomberg) — The surge in Japanese government bond yields is helping to correct some distortions in the market and provides a measure of relief to Bank of Japan policy makers.

The 10-year yield is eyeing a break out of negative territory for the first time since March, approaching the key zero percent level around which the BOJ has built its yield curve control policy. The benchmark yield rose to as high as minus 0.03% Tuesday, after falling to near a record low of minus 0.295% early in September. It traded at minus 0.05% Wednesday

The move has eased pressure on the central bank to taper bond purchases to prevent a downward spiral in yields. After a flurry of cuts in August and September, the BOJ has kept purchases in the key 5-10 year zone unchanged in its regular operations, including on Monday.

“It won’t boost purchases, and because the yield is near zero, it won’t taper buying,” said Takenobu Nakashima, senior rates strategist at Nomura Securities Co. in Tokyo. “Yields around current levels will not prompt the BOJ to do much at its operations.”

Meanwhile, the two-year versus five-year yield curve has come out of inversion for the first time since April. The move has made the five-year note look less expensive, raising hopes of solid demand in an auction of the maturity on Thursday, according to Kasutoshi Inadome, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley (NYSE:) Securities in Tokyo.

Further out Japan’s curve, longer-dated yields are also rising. Thirty-year yields have risen about 9 basis points this month with twenty-year equivalents up over 8 basis points, helping push the yield curve relative to benchmark JGBs out of the flattening trend it has been in for much of the year.

“The yield curve may not flatten aggressively as before because there are some signs of the global economy stabilizing,” said Naoya Oshikubo, a senior economist at Sumitomo Mitsui Trust Asset Management Co. “An excessive curve steepening may see some unwinding but it won’t enter a serious flattening trend unless it becomes evident that the U.S. economy has slipped into recession.”

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