TOKYO: Japanese government bonds tumbled on Wednesday after the Bank of Japan surprised - and perplexed - market players as the central bank appeared to reduce buying in short-dated bonds by veering from its playbook on bond-buying operations.
Yields on super-long bonds - those maturing in 20 to 40 years - soared to 11-month highs while the 10-year JGB futures fell as much as 0.54 point, the biggest intraday decline since Nov. 16. They ended down 0.31 point at 150.08.
The BOJ shocked the market by not offering to buy JGBs with one to five years to maturity on Wednesday, when such an operation had been deemed as a certainty.
"The confidence we had on the BOJ has crumbled. Now we are having distrust," said a bond trader at a major Japanese brokerage.
The BOJ buys those maturities six times per month and so far this month it has bought them four times, leaving two more operations to do by the end of month.
Wednesday and the coming Friday had been considered as the only windows left, based on the BOJ's usual stance to avoid conducting bond operations on days when the Ministry of Finance holds bond auctions and when the BOJ makes policy announcement.
Thus by skipping buying on Wednesday, the BOJ appeared to have reduced buying in short maturities this month.
The five-year JGB yield rose 4.0 basis points to minus 0.105 percent.
Many market players struggled to grasp the BOJ's intention.
"The BOJ may have tried to avoid buying so as not to exacerbate the shortage of those maturities and this could be a one-off move," said Koichi Sugisaki, vice president at Morgan Stanley MUFG Securities.
Reflecting the scarcity, the five-year yield hit a 2 1/2-month low of minus 0.14 percent the previous day.
Yet the BOJ's move was a complete surprise to the market, raising speculation the central bank may be starting to taper its bond buying.
"It would have been obvious that it would have a negative impact on the market if they do this when brokerages have long positions after five-year JGB auctions (last Thursday) and when foreign bonds markets are being sold," said Morgan Stanley's Sugisaki. "So it is hard to understand why they are doing this now."
Adding salt to the wound from the market's point of view, the BOJ did not increase buying in super long bonds in its Wednesday operations - even as their yields neared peaks reached in December, about three months after the central bank introduced a policy to control the yield curve.
The 20-year yield rose to as much as 4.0 basis points to 0.655 percent, its highest since late February.
The 30-year yield hit an 11-month high of 0.830 percent and the 40-year yield rose to 0.995 percent .
The benchmark 10-year JGB yield, which tends to move less than other maturities because of the BOJ's policy to peg it around zero percent, rose 2.5 basis points to 0.065 percent.
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