TOKYO, May 22: Japanese government bonds edged up on Wednesday in line with a rise in US bonds following dovish comments from Federal Reserve officials, but the Bank of Japan’s looming policy meeting kept traders on edge.
* The yield on the 10-year cash bonds fell 1.5 basis points to 0.865 percent. The yield hit a one-month high of 0.920 percent a week ago.
* Japanese government bonds are going through their worst bear market since 2008 after the BOJ stunned investors on April 4 with unprecedented monetary easing. That has made what the central bank says about JGBs the biggest focus for investors.
* Although the BOJ has sharply increased bond buying, pledging to double its bond holdings in two years, sharp gains in shares and the fall in the yen has prompted investors to sell JGBs.
* ‘Hardly any investors expected the yen’s fall and rally in shares of this magnitude. Everyone got it wrong so far. So some investors are starting to think that Japan’s growth could be much higher than they had thought if this continues,’ said Tohru Yamamoto, chief fixed income strategist at Daiwa Securities.
* Few market players expect the BOJ to take new policy actions at its two-day policy meeting ending on Wednesday. But a small number of players expect the BOJ could introduce a new funding scheme, such as a two-year liquidity offer.
* The market is keenly focused on what Governor Haruhiko Kuroda will say about the recent rise in bond yields. The BOJ said last month that its stimulus was aimed at bringing down the yield curve – and the opposite has happened since then.
* ‘JGBs’ reaction is not in line with the BOJ’s expectations. If Kuroda was to say that rise in bond yields are natural when the economic outlook is improving even though that is clearly not in sync with the BOJ’s original view, those who have long JGBs positions will be upset and sell,’ said a trader at a major Japanese bank.
* Ahead of the outcome of the BOJ meeting, expected some time around 0300-0500 GMT, the market was taking its cue from U.S. Treasuries for now.
* U.S. Bond prices gained as St. Louis Fed President James Bullard, seen as a centrist on policy, took a more dovish tone than before, saying that the U.S. Recovery has been disappointing and that he cannot see a good case for tapering unless inflation increases.
* New York Fed President William Dudley, expressed similar sentiment to Bullard, saying that the economy’s ability to weather lower government spending and higher taxes in the coming months will be key to the US central bank’s decision on whether to reduce bond purchases. (AGENCIES)
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