Tokyo talkies: Speculations leave bonds shaken & stirred

Singapore: Speculation about a shift in Japanese monetary policy is changing the shape of bond markets around the world.

The gap between short and long term yields is widening globally on bets the Bank of Japan's next monetary twist will be to steepen the yield curve at its Sept. 20-21 policy meeting. It'll achieve that by cutting its negative interest rate further, while simultaneously reducing purchases of long-term bonds, according to Morgan Stanley MUFG Securities Co. in Tokyo, one of the nation's 21 primary dealers.

Such moves have the potential to ripple across the globe by reversing this year's collapse in Japan's longest-dated yields, which had encouraged investors in the world's second-biggest bond market to pour cash abroad. A change in a leading central bank's thinking also has the potential to influence the mindset of investors and policy makers from other major developed economies. The shift is upending conventional wisdom in the Treasuries market, where the yield curve customarily flattens as the Federal Reserve raises interest rates.

“It's contrary to everybody's instincts,“ said Yusuke Ito, senior investor in Tokyo at Mizuho Asset Management, which oversees $48.8 billion. “Japan has been a front-runner of monetary policy.The Fed this time around is not that important.“

KURODA SPECULATION
Traders have been speculating for days that BOJ Governor Haruhiko Kuroda would try to steepen Japan's curve as a way to help the nation's lenders in order to support the economy -even as he seeks to revive inflation that remains well below the 2 percent goal brought in 3 12 years ago.

A steeper curve helps banks when they borrow for shorter terms and make long-maturity loans. It also provides savers greater returns for those willing to invest over several years. A curvesteepening policy carries risks for bondholders. Investors facing negative yields on bonds due in a decade and less have spent 2016 gorging on long-term debt -the most volatile securities -as they seek income.Now they're left holding those bonds most vulnerable to a selloff just as analysts say the central bank is plotting a policy shift that will send prices down as yields rise.

STEEPER CURVE
In the US, the world's biggest bond market, the spread between two and 10-year yields grew to 95 basis points, the most since June.

If the trend holds, it'd break the usual pattern. The US curve has flattened in each of the Fed's five courses of rate hikes taking place over almost four decades. That's because short-term yields climb as the c e n t r a l b a n k i n c re a s e s i t s benchmark.“The US Treasury curve is basically telling me they don't expect a rate hike next week at all,“ said Martin van Vliet, an interest-rate strategist at ING Groep NV in Amsterdam.

Japan's curve measured from twoto 10-year yields widened to the most since February this week.Forecasts for the BOJ to act helped drive a 30 percent rally in the Topix Banks Index from early July through early September.