BOJ Steps In to Buy Bonds Again as Traders Don't Heed Signal

(Bloomberg) -- The Bank of Japan offered to buy an unlimited amount of bonds for a third time in a week after the benchmark 10-year yield rose to an almost 18-month high ahead of the central bank’s policy decision on Tuesday.

The offer, made at 0.1 percent for the five-to-10 year maturities, drew some 1.6 trillion yen ($14.4 billion) of bids which were all accepted, according to the central bank. The 10-year yield pared the day’s advance after the move was announced.

Speculation the BOJ may make tweaks to its bond purchases and negative-interest-rate policy to limit their side effects has sent yields tripling in the past week, while also spurring a steepening in global debt markets. The central bank may allow a bigger trading range for 10-year yields, or consider adjusting its annual target to expand its balance sheet, according to analysts.

“The biggest reason for this operation was the risk that the 10-year yield would rise significantly away from zero,” said Takenobu Nakashima, a quantitative strategist at Nomura Securities Co. in Tokyo. “The BOJ clearly wanted to send a message it will defend the 10-year target around zero percent.”

BOJ Steps In to Buy Bonds Again as Traders Don't Heed Signal

The 10-year yield was half a basis point lower at 0.095 percent, compared with the 0.11 percent touched before the operation. That compares with a close of 0.03 percent on July 20. The yen was steady at 111.05 against the dollar as of 5:02 p.m. in Tokyo.

The purchase on Monday was significantly larger than the 94 billion yen bought in a similar operation on Friday, as prevailing bond prices were below where the BOJ was buying, allow investors to take advantage of the spread.

Any tweaks would be the first since the central bank announced yield-curve control in September 2016. Monday’s fixed-rate operation was the seventh since the policy was introduced, and the first time it has conducted three operations within a single week.

BOJ Steps In to Buy Bonds Again as Traders Don't Heed Signal

“The BOJ faces an extremely difficult situation,” said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “At this meeting, it may just suggest that the rate used for unlimited bond buying isn’t fixed, as indicated by Friday’s market operation. This is just an area of adjustment in implementation, not the policy itself.”

The fixed rate of 0.10 percent for the operations on Friday and Monday was lower than the 0.11 percent offered at four previous operations for the five-to-10 year maturities.

‘Prime The Market’

The dilemma for Governor Haruhiko Kuroda is that even as calls to adjust policy grow louder, persistently weak inflation dictates the need to maintain stimulus. Winding it back would strengthen the yen, further undermining efforts to spur price-gains, while also hitting Japanese exporters.

While Kuroda and his board have said they would consider discussing an exit from the stimulus policy from fiscal 2019, they have also reiterated that there would be no change until the BOJ’s inflation target of 2 percent has been reached.

“I don’t think they may act as soon as tomorrow, it may be that they prime the market for a move later on in this year,” Claudio Piron, co-head of Asian currency and rates strategy at Bank of America Merrill Lynch in Singapore, said on Bloomberg Television.

“If there’s something a bit more aggressive, let’s say they shift the targeting away from 10-year to 5-year point of the curve, then we may have more of a sustained impact as well in terms of a steeper curve and a lower dollar-yen,” he said.

History of BOJ’s fixed-rate operations:

DatePlanned purchasesMaturitiesBid yield for reference bondAmount bought
YearsPercentBillion yen
July 30, 2018Unlimited5 to 100.1001640.3
July 27, 2018Unlimited5 to 100.10094
July 23, 2018Unlimited5 to 100.110No purchases
Feb. 02, 2018Unlimited5 to 100.110No purchases
July 07, 2017Unlimited5 to 100.110No purchases
Feb. 03, 2017Unlimited5 to 100.110723.9
Nov. 17, 2016Unlimited1 to 3, 3 o 5-0.090 (2s), -0.040 (5s)No purchases

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