Bonds

Japan bonds, yen take a wild ride as central bank puts kibosh on yield rise

Japanese government bond yields spiked on Friday, with the 10-year jumping the Bank of Japan's target rate, before the central bank lassoed it back into place.

The benchmark 10-year JGB yield jumped as high as 0.155 percent in intraday trade on Friday, the highest levels in around a year, around the time that the BOJ surprised markets by introducing negative interest rates.

The rise in yields also enhanced the attractiveness of the yen, which climbed against the greenback. The dollar at one point fetched as little as 112.49 yen.

But by 1:43 p.m. HK/SIN, the 10-year yield had slipped back to 0.098 percent and the dollar was fetching more than 113 yen.

The 10-year yield eased after the BOJ stepped in to the market with a special operation, with Reuters reporting the central bank offered to buy the benchmark bond at a yield of 0.110 percent, implying a much higher price than levels prevailing in the secondary market. Bond prices move inversely to yields.

Japanese yen
John Phillips | Digital Editor for CNBC.com

The BOJ said the move was aimed at bringing the yield back down to its target of around zero percent, Reuters reported.

But why, if the market knew the BOJ's yield curve control program sets the 10-year yield at around zero, did the yield wander so far from its baseline?

Takuji Okubo, chief economist at Japan Macro Advisors, said the BOJ hadn't acted for a while as the 10-year yield had inched up from zero.

"The market has interpreted that that BOJ was basically allowing it, and not trying to constrain the 10-year yield," he said. "The market was basically testing how strongly the BOJ feels about the 10-year interest rate guidance."

Okubo also noted that some bond managers had viewed the 10-year bond as overvalued, compared with other parts of the yield curve.

Reuters also reported that when the BOJ engaged in its regular bond buying operations on Friday, it disappointed the market by not purchasing bonds with tenure of 25 years or longer. That had pushed up the longer end of the yield curve to levels not seen in around a year as well.


Another factor that may have influenced Japan bond yields on Friday: The BOJ released the minutes from its December meeting. While the minutes are often considered a non-event, as they're always from the meeting before last, this set offered some slight variation on the BOJ's thinking.

One member had said the shape of the JGB yield curve should be allowed to steepen and that the long-end of the curve should be allowed to fluctuate in a larger range, particularly to the upside, according to the minutes.

The minutes also noted that "a few members" pointed out that financial markets appeared to believe the 10-year target level at around zero percent indicated a band of negative 0.1 percent to 0.1 percent. But those members then said they believed it wouldn't be appropriate to set "such uniform standards," the minutes showed.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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