Trading Drought Worsens in Japan’s Broken Bond Market


(Bloomberg) — In a fresh sign of Japan’s dysfunctional bond market, the 10-year benchmark failed to trade for a third consecutive session Tuesday, the longest such streak since 1999.

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The Bank of Japan’s overwhelming presence in the JGB market where it’s the biggest buyer under its curve control policy has exacerbated liquidity issues and led to a deterioration in market functioning. A gauge of liquidity stress in the Japanese bond market has hit levels last seen over a decade ago.

“There is no incentive to buy the 10-year notes from a carry income perspective or for trading purposes,” said Ataru Okumura, a strategist at SMBC Nikko Securities Inc. in Tokyo. “It’s hard for investors to hold 10-year bonds for the longer-term as the sector being the BOJ’s yield curve target makes it expensive relative to other parts of the curve.”

The BOJ has emphasized its determination to stick with rock-bottom interest rates even as global peers hike to rein in inflation. It has a 0.25% ceiling for the 10-year yield and only an unprecedented buying campaign has kept the benchmark from following global peers higher amid speculative attacks from traders betting on a policy tweak.

“The BOJ’s yield curve control has also limited the downside in yields, making price swings in 10-year zone almost nonexistent for short-term players looking to gain from daily trading,” Okumura said.

Investors still expect JGB yields to rise as the Federal Reserve presses ahead with more monetary tightening, heaping pressure on the BOJ. Ten-year yen swap rates — which are popular with international funds — have climbed to more than double the 0.25% line in the sand, a sign that at least some traders are betting Japanese authorities will eventually be forced into a policy shift.

Global bonds saw further volatility Tuesday amid a warning that the Bank of England would remove emergency market support.

(Adds paragraph on global bond moves Tuesday.)

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