Reporter of the Economic Business: Wen Qiao Reporter of the Economic Business Business: Gao Han
On October 12, the Japanese bond market had a strange phenomenon that had not been seen in more than 20 years - Japan's latest 10-year treasury bond was not traded for the fourth consecutive day, the longest duration since 1999, and the trading volume continued to dry up. It was not until October 13 that Japan's 10-year Treasury bonds were traded for the first time in five trading days.
The overwhelming position of the Bank of Japan in the Treasury bond market is aggravating the liquidity problem in the bond market, and the market function is becoming increasingly ineffective.
"The Bank of Japan's dominant share in the Japanese treasury bond market and its determination to maintain interest rates near zero before stably achieving the 2% inflation target have seriously damaged the market function or price discovery function of the Japanese treasury bond market." In an email interview with a reporter from " Daily Economic News ", Izuto, Nagato, pointed out that coupled with the selling pressure from abroad, has caused a "zero transaction" situation for Japan's 10-year treasury bonds for several consecutive days.
However, he also believes that (Japan 10-year Treasury bond) market transactions will recover after the overseas selling pressure weakens, although market transactions cannot be expected to be active again.
As of press time, Japan's 10-year Treasury bond yield was 0.244%, lower than the Bank of Japan's 0.25% yield control target. Bloomberg's Japan Government Bond Liquidity Index shows that liquidity pressure in the Japanese bond market has risen to a new high in more than a decade.
In addition to the huge liquidity pressure on the Japanese government bond market, the yen has also fallen below an important point again. On the evening of October 13, after the United States released an overexpected inflation report, the yen fell to its lowest level in 32 years, and the yen exchange rate against the US dollar fell to 147.67, the lowest level since 1990 . As of press time, the exchange rate of the Japanese yen to the US dollar was 147.59.
Image source: Yingwei Finance
Behind the "zero transaction": Overseas selling pressure and YCC policy
Nagai Shitoshi believes that one of the reasons for the zero transactions of Japan's 10-year treasury bonds for many consecutive days is the pressure brought by overseas investors' recent selling of Japanese treasury bonds. According to preliminary data released by the Japanese Ministry of Finance, in September, overseas fund sold 6.39 trillion yen (about 43.9 billion US dollars) of Japanese bonds, most of which were government bonds, setting an all-time high.
"Foreign investors maintain short positions in long-term Japanese Treasury bonds, believing that the Bank of Japan's yield curve control (YCC) policy is unsustainable in the context of rising global yields and depreciation of the yen leading to increased inflation concerns." He told the Daily Economic News reporter.
"Currently, market participants have no incentive to buy 10-year Japanese Treasury bonds unless they see weakening selling pressure from foreign investors and Japan's 10-year Treasury bonds are traded again within the yield range set by the Bank of Japan (between -0.25% ~ 0.25%)." Nagai Shito added, "And the timing of this shift depends on the outlook for U.S. inflation and the possible extent of the Fed's interest rate hikes . At least by the end of this year, foreign investors will continue to challenge the Bank of Japan by selling long-term Japanese Treasury bonds and yen." Under the huge selling pressure, the abnormality of zero transactions for many consecutive days is also related to the Bank of Japan's monetary policy . In order to achieve the 2% inflation target, the Bank of Japan has implemented a long-term ultra-loose monetary policy, setting the short-term interest rate to negative 0.1%, and maintaining the long-term interest rate at around 0.
The indicator used for long-term interest rates is the yield of newly issued 10-year treasury bonds, and the upper limit of yield fluctuations is set at 0.25%. Affected by the sell-off, Japan's 10-year Treasury bond yield once hit the upper limit of 0.25%. The Bank of Japan conducted several bond purchase operations in September, maintaining its yield curve control target.
According to foreign media reports, this makes the Bank of Japan the largest buyer of government bonds in the market, holding a large amount of Japanese government bonds, and the number has reached half of the current market total.
"The Bank of Japan conducted unlimited purchases of Japan's 10-year government bonds at a daily interest rate of 0.25%. " said Shizuto Nagai. “In fact, the Bank of Japan’s dominant share of the Japanese Treasury market and its determination to keep interest rates near zero before stabilizing the 2% inflation target have seriously damaged the market function of the Japanese Treasury market."
He concluded, "In this way, Japan's treasury bond yield curve is distorted by the overall selling pressure of overseas investors and the policy ceiling of 10-year yield under the YCC policy. "
" After the selling pressure weakens, transactions resume, but may no longer be active."
According to CCTV Finance, the newly issued 10-year Treasury bonds have been zero transactions for many consecutive days, which also reflects that the Bank of Japan's yield defense line has been out of touch with the market supply and demand situation. The real yield under the market mechanism is actually higher than 0.25%. Zero transactions also show that market investors do not recognize the Bank of Japan's monetary policy and believe that the Bank of Japan will eventually abandon this policy.
Image source: Yingwei Finance
According to CCTV Finance, in late September, Japan's newly issued 10-year treasury bonds had zero transactions for two consecutive days. Under the current background of the double pressure on debt and foreign exchange, will Japan's 10-year treasury bonds not be traded?
Nagai Shito believes that "market transactions will recover after the pressure of overseas selling has weakened, although we cannot expect transactions to be active again. ”
He added, “Although the Bank of Japan dominates the Japanese government bond market, there are still domestic investors who need Japanese government bonds. Insurance companies and banks are major domestic players in the Japanese Treasury bond market, and even if interest rates are low, they still need Japanese Treasury bonds for investment and risk management. Japanese Treasury bonds also need to be used as collateral for market transactions, including liquidity provided by the Bank of Japan. ”
According to CICC Foreign Exchange Research, Japanese bond trading can be roughly divided into two categories, one is transactions formed on bond trading platforms such as Japan Mutual Securities, and the other is OTC . In the past 4 trading days, although there are no transactions on the Japan Mutual Securities platform, there are still 10-year Treasury bond trading in over-the-counter trading.
Regarding the further impact of this incident on Japanese financial market , Nagai Shito told the reporter of the "Daily Economic News", "Although we believe that weak economic fundamentals will continue to prove that the current low interest rates are reasonable in the foreseeable future, we are worried that the fiscal authorities will increasingly rely on the Bank of Japan's low interest rate policies to ensure smooth fiscal financing. ”
He further said, “As the recent market turmoil in the UK has shown, the government bond market has an important function to give government fiscal discipline. Without severe measures to restore long-term fiscal balance, the Bank of Japan can temporarily support the Japanese government bond market, but this is not a long-term solution. If you pay too much attention to short-term demand, decision makers often ignore this fact. ”
Investors expect that as Feder further tightens monetary policy, Japan's Treasury bond yields will inevitably rise, which will put greater pressure on the Bank of Japan.
Daily Economic News
