Even the Bank of Japan, which has been pushing bond yields below zero by charging interest on bank reserves, has its limits.
Almost a fifth of the 645 billion yen ($5.7 billion) of the debt put up for sale at a money market operation Monday was left unbought as the BOJ shunned commercial paper with yields of minus 0.647 percent or less. At its March 18 operation to buy Japanese government bonds with repurchase agreements, it also excluded bid yields lower than the average accepted level and bought less debt than its target.
“The BOJ has shown its stance that while its operations aim to lower yields, it will pay heed to market levels and won’t take rates that considerably deviate from reality,” said Takafumi Yamawaki, the chief rates strategist in Tokyo at JPMorgan Chase & Co. “The BOJ doesn’t want pricing that’s too far from where markets are.”
The inability of the operation to achieve its target prompted brokerages to speculate as to whether the central bank was seeking to avoid a bubble in prices or just to limit the losses it suffers in asset-buying stimulus. The BOJ has been increasing its targets for CP purchases this year and reducing buying of bonds as investors become more reluctant to sell longer-dated debt with positive yields.
SMBC Nikko Securities Co. wrote in a report that the operations may give the impression that the central bank is unwilling to buy securities at yields about 20 basis points below the average accepted level. When bid-to-cover ratios for the BOJ’s JGB purchases fall toward one, there’s a high likelihood the central bank will exclude bid yields that deviate greatly from average, it said.
The central bank is highly unlikely to buy commercial paper with yields at minus 1 or minus 2 percent, said Yoshihito Yasuda, a researcher at Totan Research in Tokyo. The BOJ will probably incur a significant loss from Monday’s purchase of 530.4 billion yen in commercial paper with an average yield of minus 0.428 percent and a mean maturity of about one month, he said.
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The BOJ’s first offer in five years to buy government debt under repurchase agreements garnered almost 385 billion yen in accepted bids on March 18, less than the 500 billion yen target. It rejected bids with yields of minus 0.3 percent or less, a level about 20 basis points below the average accepted rate.
Benchmark 10-year securities closed with a yield of minus 0.09 percent on Tuesday, according to Japan Bond Trading Co., the nation’s largest inter-dealer debt broker. A basis point is 0.01 percentage point.
Lower borrowing costs have already allowed Sumitomo Mitsui Finance & Leasing Co. to issue 5 billion yen of six-month commercial paper with a rate of minus 0.001 percent on Monday. The Japan Securities Depository Center and the Tanshi Kyokai, an association of brokers, upgraded their systems last week to help settle securities with negative rates.
“If real demand pushes issuance rates below zero, then it makes sense for the BOJ to buy at lower yields, but CPs have been issued with yields around zero percent,” Totan’s Yasuda said. “The BOJ probably wants to avoid turning BOJ operations into a game.”
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