Japanese government bond futures softened on Thursday, paring early gains after the Bank of Japan held off making any new policy easing steps, prompting some investors who had bet on more measures to exit their positions. Cash JGBs were little changed but the five-year/20-year yield curve remained near its widest in a decade as the market anticipated the central bank will remain under government pressure to ease further eventually to fight deflation.
Traders expect that if it does ease again, the BoJ is likely to extend the duration of its three-month funding operation introduced in December to six-months or longer, or increase the amount of funds offered from 10 trillion yen now, or do both. "If the yen jumps or shares drop, the yield curve could further steepen as expectations for more policy easing would intensify, pushing down bond yields," said Makoto Yamashita, chief Japan interest rate strategist at Deutsche Securities.
The BoJ launched the operation last year amid political pressure to combat deflation and support the economy. On Thursday it kept interest rates at 0.1 percent, as expected. In the main market participants had not expected it to introduce new easing steps. But analysts do speculate that as an extra step, it could also eventually increase the amount of JGBs it buys from the market, considered a more substantial form of easing, although central bank watchers say it is likely to do so only as a last resort.
The five-year/20-year yield spread held at 166 basis points, off 167 basis points reached earlier this week, its steepest in a decade according to historical data on Reuters EcoWin. The yield curve has steepened as shorter-dated maturities have fallen more than their longer-dated couterparts under the BoJ's very easy monetary policy.
The five-year yield has been hovering near a four-year low as domestic banks, flush with cash under the BoJ's easy policy and slack lending, have been parking their money in midterm notes. On the other hand superlong yields have not fallen as much as the pull of BoJ's low-rate policy weakens further down the curve.
This has made the longer-dated maturities more susceptible to supply concerns, preventing sharp yield declines as bond investors expect JGB issuance to increase going forward. March JGB futures declined 0.01 point to 139.60, handing back earlier modest gains. The five-year yield was unchanged at 0.500 percent after touching a four-year low of 0.425 percent two months ago. The benchmark 10-year yield dipped 0.5 basis point to 1.315 percent. The 20-year yield also slipped 0.5 basis point, to 2.160 percent after touching a three-month high of 2.170 percent earlier this week.