TOKYO, June 19 The yield on the 30-year Japanese government bonds jumped 5.5 basis points on Thursday, its biggest daily rise in over a year, after the Bank of Japan said it would reduce the amount of buying in that maturity.
The longest maturities bucked the overall market trend as their shorter peers held firm after the U.S. Federal Reserve struck a dovish tone, showing no particular discomfort with inflation.
The 30-year yield rose to 1.715 percent after the BOJ said on Wednesday it will reduce its buying in maturities over 25 years as it fine-tunes its bond buying operations.
Market players said the BOJ had to limit its buying in such maturities to keep the duration of the BOJ's bond holdings around seven years as mandated by the Policy Board.
The change was enough to unsettle a market that has become so dependent on the BOJ, which buys an amount equal to 70 percent of new JGB issues in its quantitative easing programme.
The central bank reduced the purchases of maturities exceeding 10 years in its regular market operations to between 130 billion yen and 350 billion yen ($1.3 billion and $3.4 billion) from 150 billion and 350 billion yen now.
In reality, however, its buying has been stuck at the bottom of those ranges in recent months.
The BOJ said in addition that it will divide this category into two, buying 100 billion yen in those with 25 years to maturity or less and just 30 billion yen in longer maturities, such as 30- and 40-year bonds.
Keiko Onogi, senior JGB strategist at Daiwa Securities, estimates that the BOJ was buying 59 to 76 billion yen in maturities over 25 years prior to this announcement.
"That is a big reduction. There will be a steepening pressure on the yield curve for the time being," she said.
The spread between 10- and 30-year yields rose to 115 basis points, matching the highest level since the BOJ started the current quantitative easing in April last year, reversing sharp fall earlier this month.
"I think super-long bonds could be sluggish until the next 30-year bond auction (on July 10,)" said a trader at a Japanese bank.
Shorter maturities fared better, as they took cue from a rise in U.S. bond prices after the Federal Reserve took a more dovish stance than some market players had expected after its latest policy meeting ended on Wednesday.
The Fed showed no particular discomfort with inflation despite a recent pick up in prices, and it lowered the long-term projections for interest rates.
The 10-year JGB yield fell 0.5 basis point to hit a two-week low of 0.585 percent while the price of 10-year JGB futures rose 0.07 point to 145.34. (Editing by Kim Coghill)