Japanese bonds edge down on fiscal year-end selling pressure

The Japanese 10-year bond prices edged down on Tuesday as investors tweaked their debt holdings ahead of the fiscal year-end, generating some selling. Also, the Bank of Japan did not conduct any regular bond-buying operation on Tuesday as part of its extensive easing scheme and also removed some support for the JGB market.

Meanwhile, the benchmark 10-year JGB yield rose 1 bps to -0.085 pct and June 10-year JGB futures dipped 0.09 point to 151.78.

Moreover, the BoJ's adoption of negative rates in January has driven JGB yields below zero, while also increasing its market volatility.

“The JGB market is really in a bubble, when you think about it as an investment vehicle,” said Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo. 

“The bonds prices have moved away from fundamentals, and people don’t have a traditional way to measure their investment value,” he added

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.

Additionally, for the last 3 remaining sessions of this fiscal year ending on Thursday, March 31, the BoJ is widely expected to buy JGBs only tomorrow under the above-mentioned program. JGB traders see the BoJ buying JPY400bn of 1-yr to 3-yr JGBs, JPY420bn of 3-yr to 5-yr JGBs, JPY240bn of 10-yr to 25-yr JGBs, and JPY160bn of 25-yr to 40-yr JGBs tomorrow. Therefore, it seems to be hard for short-term players to sell JGBs short aggressively today in thin trading, as it is difficult to cover their shorts smoothly.

But the JGB market would be extremely fragile, once Japan's CPI were to rise 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 promised that they will continue to buy JGBs even at deep negative yields.