Rest of the Year Off? Dealers See Record Low Moves: Japan Credit

Jul 10, 2014 7:48 pm ET

July 11 (Bloomberg) -- Japan’s bond traders might as well take the rest of the year off.

Paralysis in the sovereign market, where price swings and trading volumes are near record lows, will persist until at least the end of 2014, according to nine of 14 primary dealers in a Bloomberg News survey. Historical volatility slid to 0.647 percent on June 30, the lowest in data going back to 1994, while the U.S. figure was at 2.679 percent. Japanese 10-year bonds failed to trade on April 14 for the first time since 2000 and lack of activity delayed trading at least four times last month.

Yields on government notes are stuck in the narrowest range in data going back to 1990, after the Bank of Japan’s unprecedented asset-purchase program made Governor Haruhiko Kuroda the biggest player in the $9.6 trillion market. It will take a policy change by the BOJ or the U.S. Federal Reserve to breathe life back into the market, all 14 brokerages said.

“This low volatility will probably continue until next summer, when the BOJ will be looking for an exit from stimulus at just the time the Fed is close to raising rates,” said Takafumi Yamawaki, the Tokyo-based chief rates strategist at JPMorgan Chase & Co. “Until then, BOJ buying will be so powerful that macroeconomic factors won’t be able to move the market.”

The 12-month moving average of JGB trading volume dropped to a record 39.2 trillion yen ($386 billion) in May, Japan Securities Dealers Association figures dating back to 2004 show.

Yield Outlook

Even with the market largely frozen, the brokerages obliged to bid at government debt auctions expect the world’s lowest yields to rise gradually, amid an advance in U.S. borrowing costs as the Fed gets closer to its first interest-rate increase since 2006.

Japan’s 10-year yield will gain to 0.65 percent at the end of the year from 0.545 percent in Tokyo yesterday, and to 0.7 percent at the end of March, according to the median forecast of 17 primary dealers. The 30-year rate will advance to 1.75 percent by Dec. 31, and to 1.85 percent in March, from 1.715 percent, they said.

The longer-term bonds had their worst rout in a year last month after the BOJ announced it would divide purchases of debt maturing in more than 10 years, allocating 30 billion yen for bonds due in more than 25 years and 100 billion yen for shorter- dated debentures.

‘BOJ Trade’

Three of 10 analysts that offered trade recommendations picked so-called curve steepeners, betting on 30- and 40-year bond yields to rise more than those of notes due in a decade, an approach Tokyo-based Bank of America Merrill Lynch strategist Shuichi Ohsaki called “the BOJ trade.”

Four primary dealers predicted increased speculation about the Fed’s exit from near-zero rates will be enough to spur price swings in the JGB market by fall.

Traders are pricing in a 50 percent chance that the Fed will raise borrowing costs by the end of June, up from 42 percent odds at the start of the month. While the U.S. added more jobs in June than analysts predicted, hourly earnings growth slowed.

Employers hired 288,000 workers in June, compared with the 215,000 projected by a Bloomberg News survey of economists. Average hourly earnings increased 2 percent in June from the year before, versus 2.1 percent in May and 2.7 percent five years earlier.

Treasury Yields

Treasury notes due in 10 years yielded 2.54 percent, after touching an 11-month low of 2.4 percent in May. The rate averaged 3.4 percent in the past decade.

“Even more than the BOJ’s easing, what’s keeping yields low in Japan is low yields in the U.S.,” said Kazuhiko Ogata, chief Japan economist at Credit Agricole SA. “Don’t underestimate the possibility of a first Fed rate hike being brought forward, which would boost U.S. yields and wake up the JGB market.”

Japan’s benchmark 10-year yield fell to an all-time low of 0.315 percent on April 5, 2013, the day after the BOJ announced it would buy about 7 trillion yen of government bonds each month to stimulate the economy. The yen plunged 18 percent against the dollar in 2013 and is up 3.7 percent this year, trading at 101.53 as of 1:12 p.m. in Tokyo yesterday.

Three-quarters of analysts expect additional easing from the BOJ, according to a Bloomberg survey last month. That’s down from 84 percent in a May poll as Kuroda expressed optimism over the effectiveness of current policy settings. The most likely time for action has been pushed back to October from the July meeting.

“It doesn’t matter if it’s additional easing or tapering from the BOJ, either would really move the market,” said Yusuke Ikawa, a rates strategist in Tokyo at UBS AG, who sees the price swings increasing from next year. “Everything depends on the BOJ, and as long as policy makers remain idle, volatility will stay low.”

Company              10-Year      30-Year     Volatility
BofA Merrill Lynch   0.60/0.65   1.75/1.80    2H 2015
Barclays             0.85/1.05   1.95/2.15    Year-end
BNP Paribas          0.80/1.00   1.90/2.15    N/A
Credit Agricole      0.75/0.80   1.85/1.90    After Oct.
Credit Suisse        0.65/0.70   1.75/1.80    End-March 2015
Deutsche             1.20/1.20   2.00/2.00    Late-Aug.-Sept.
JPMorgan             0.55/0.65   1.80/1.90    After Summer 2015
Mitsubishi UFJ MS    0.60/0.75   1.75/1.85    4Q
Mizuho Bank          0.60/0.65   1.75/1.80    March-April 2015
Mizuho Securities    0.65/0.75   1.80/1.85    2Q 2015
Morgan Stanley       1.10/1.30   2.00/2.15    After Summer
Okasan Securities    0.60/0.70   1.70/1.80    Year-end
RBS                  0.80/0.90   1.80/1.85    Year-end 2015
SMBC Nikko           0.50/0.50   1.60/1.60    N/A
Sumitomo Mitsui      0.60/0.60   1.70/1.70    N/A
Tokai Tokyo          0.40/0.50   1.55/1.65    Autumn
UBS                  0.70/0.70   1.75/1.75    Next year
Median               0.65/0.70   1.75/1.85

Note: 10-year and 30-year refer to yield forecasts for Dec.
31/March 31; Volatility refers to estimates for a pick-up in JGB
market price swings. The survey was conducted between June 25-
July 7.

Respondents: Shuichi Ohsaki for Bank of America Merrill Lynch,
Akito Fukunaga for Barclays, Tomohisa Fujiki for BNP, Kazuhiko
Ogata for Credit Agricole, Tomohiro Miyasaka for Credit Suisse,
Makoto Yamashita for Deutsche, Takafumi Yamawaki for JPMorgan,
Jun Ishii for Mitsubishi UFJ Morgan Stanley, Tomotaro Esaki for
Mizuho Bank, Teruyoshi Sotome for Mizuho Securities, Kenro
Kawano for Morgan Stanley, Makoto Suzuki for Okasan, Junko
Nishioka for RBS, Chotaro Morita for SMBC Nikko, Daisuke Uno for
Sumitomo Mitsui, Kazuhiko Sano for Tokai Tokyo, Yusuke Ikawa for

--With assistance from Mariko Ishikawa, Hiroko Komiya, Kazumi Miura and Shigeki Nozawa in Tokyo and Masaki Kondo in Singapore.