April 11, 2013 / 9:11 AM / 6 years ago

JGB trade turns volatile as market awaits BOJ operations tuning

* BOJ operations announcement triggers sharp market moves

* More frequent purchases, dates would be helpful-strategist

By Lisa Twaronite

TOKYO, April 11 (Reuters) - A week after the Bank of Japan said it would embark on the world’s most intense monetary stimulus, the Japanese government bond market braced itself for wild swings until the central bank fine-tunes its purchasing operations and communications.

JGBs have been highly volatile since the BOJ said a week ago that it will pump about $1.4 trillion into the economy in less than two years, in an unprecedented monetary expansion for which there is no playbook.

“Effectively, by announcing a massive, bazooka-style monetary easing, they’ve actually managed to increase risk premia, by adding volatility to the market,” said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch.

Thursday’s market moves underscored the power of the central bank to trigger significant market waves with simple operational announcements.

Ten-year JGB futures, which had plunged on hedge-selling ahead of a sale of 30-year bonds, sharply recovered after the BOJ announced details of its second and third operations under its new easing regime. Futures ended just four ticks shy of their session high, up 0.57 point at 144.73, and far above their morning low of 143.40.

Cash bonds also gyrated, with the yield on the benchmark 10-year bonds falling as low as 0.550 percent after the BOJ’s operations announcement, down from their morning high of 0.630 percent, which matched the previous session’s one-month high.

The benchmark yield plunged to a record low of 0.315 percent on Friday, when the 30-day implied JGB volatility hit a 5.32, its highest since March 2011 earthquake, tsunami and nuclear disaster.


The central bank has already taken the first steps toward establishing more orderly market operations. Senior BOJ officials met and exchanged views with financial institutions and institutional investors on Thursday afternoon on the outlook for market operations.

Since the BOJ has committed to buying 7.5 trillion yen ($76 billion) of bonds each month — about 1.4 percent of Japan’s gross domestic product — Governor Haruhiko Kuroda told reporters on Wednesday that the bond market reaction was understandable, and said he will monitor price moves carefully.

With the central bank pledging to make purchases that will total about 70 percent of newly issued debt, strategists and market participants awaited more details.

“Smaller amounts more often and announcing the dates would be helpful. If you know for sure when the operations are coming, you can manage your inventory more smoothly,” said Neale Vincent, strategist at Nomura Securities in Tokyo.

“They could be more flexible in the pace of purchases. They want investors to shift out of the market quickly, whereas they want to buy bonds on a monthly schedule. So it’s somewhat of a mismatch,” he added.

Vincent also suggested the BOJ could adjust the weightings between the sectors, because it looks like they are buying too many 5- and 10-year JGBs, relative to paper under 5-years and superlong maturities.

“I think the BOJ will clarify more its operations going forward, because if you look at what they’ve done over the last week, they’re effectively going to own the whole JGB yield curve,” Bank of America Merrill Lynch’s Fujita.

But until then, he said, the volatile market moves speak for themselves.

“Effectively, what happened was the market told the BOJ, there’s too much noise and less transparency here, and the size of what you’re going to purchase is massive, and we won’t be able to warehouse that amount of bonds for you,” he said.

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