JGB yields fall sharply on short cover buying after BOJ maintains policy

JAPANESE government bond (JGBs) yields fell sharply on Friday (Mar 10) after the Bank of Japan (BOJ) maintained its policy, as short sellers raced to close their positions by buying back bonds.

The yield on the 368th 10-year bonds fell to negative 0.035 per cent. The benchmark 10-year bond yield fell 11.5 basis points (bps) to 0.385 per cent, its lowest since Jan 24 in its deepest decline in seven years.

The BOJ maintained ultra-low interest rates and held off from making changes to its controversial bond yield control policy.

The move defied some expectations of a policy tweak, as pressure is building on the BOJ’s stance with inflation picking up and large employers lifting wages.

These expectations, in some quarters, included the BOJ widening the trading band of the benchmark 10-year yield further or shifting its yield target to a shorter duration.

“Investors needed to buy back bonds as they cannot afford to keep their short positions,” said Masayuki Koguchi, general manager at the fixed income investment division of Mitsubishi UFJ Kokusai Asset Management.

Last month, the central bank quadrupled the minimum fee charged to financial institutions for borrowing some 10-year bonds and reduced the maximum amount for lending, a move to deter market players from short-selling the notes.

But Friday’s surge in bond prices indicated some players still shorted JGBs ahead of the policy meeting, said Kazuhiko Sano, chief fixed income strategist at Tokai Tokyo Securities.

“Bond prices might have risen so sharply because there were not many who wanted to sell amid the dearth of liquidity,” said Sano.

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The BOJ owned more than 100 per cent of the 368th bonds as of end-February, according to a note by Keisuke Tsuruta, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

The 10-year JGB futures jumped 1.09 points to close at 146.15. Yields on both the 20-and 30-year JGBs fell 7.5 bps. REUTERS