Japanese bond yields rise on expectation of strong U.S employment data

The Japanese 10-year bond prices slumped on Thursday as traders look to strong U.S. employment data for the next clue to the Federal Reserve’s interest-rate path. The benchmark 10-year bonds yield added 35.63% and 3-year bond yield up 3.75% at 7:00 GMT.

The JGB prices remain weaker across the curve, with the 2s/20s curve steepening by 2.5bp from yesterday. The current 20-yearr JGBs have traded at a single yield of 0.445 pct for JPY19bn so far through JBT, the largest interdealer broker for JGB transactions. Both investors and dealers seem to be reluctant to take large positions, except for profit adjustments on the last trading day of this fiscal year.

According to Reuters recent survey, Japanese fund managers raised overall stock allocations and trimmed exposure to bonds in their model portfolios in March as risk aversion in global markets. Moreover, the fund managers reduced Japanese debt holdings to 39.9 pct in March, lowest since June 2015, from 45.7 pct in February, underlining an increasing preference by Japanese investors for foreign bonds with Japanese government bond yields touching record lows below zero under the Bank of Japan's new negative interest rate policy.

Moreover, the BoJ's adoption of negative rates in January has driven JGB yields below zero, while also increasing its market volatility.
We expect an expansion of stimulus, and if the market happens to rule out any additional boost in stimulus, that would create an opportunity to go long and we also foresee that the 10-year note will yield about -0.15 percent at year-end.

But the JGB market would be extremely fragile, once Japan's CPI rises more than 2% on a year-over-year basis in the near future. At that time, the BoJ would be the most vulnerable victim as the largest holder of JGBs as the central bank has promised that they will continue to buy JGBs even at deep negative yields.

Apart from this, numbers of Japanese corporations are taking advantage of the negative interest rates by issuing long term debt at record low yields. Interestingly, West Japan Railway became the first corporation to issue long-term debt for 40-year.