There seems to be confusion and panic regarding the upcoming fiscal year due to the Y25tn of five-year Japanese government bonds soon reaching its mature state. Investors find themselves at odds on whether they should simply bid six times as much in order to keep constant income or should they look to purchase longer-dated bonds with the proceeds compressing whatever little it can get out of it. In either way the result is definitely bullish for bonds and only a selected few are counting on any sustained limitations in Japan’s government bond market this year.
This is the inescapable truth of “Abenomics” for the world’s second-largest bond market. Despite plenty of volatility in equity and currency markets over policies programmed to be completed for 1 %-3 % nominal economic growth which many bond investors still undeterred.
Five years along the curve, there have been already low yields that pushed even the lowest and rarest back-to-back monetary easing by the bank of Japan. Investors are waging a new BoJ governor this quarter to take more radical measures under the progressive monitoring of the government.
The 5-10 year sector fairly held a steady pace as a result of the determination of banks-the largest players in the JGB market, sharing more than a fifth of the Y94tn ($10tn) which was very exemplary in earning more income moving much further up the curve.
It is beyond that the super-long sector that had experienced a slight sell-off since the old government call for an election last year in November as investors mulled the potential inflation highs and the risks of a losing fiscal policy.
Foreign investors have specifically noted the so-called “steeperner” trades with expectations that although shorter-term yields will remain relatively anchored in by the BoJ; longer-term yields are expected to rise in the long run.
For the meantime, experts analysed the inflation and doubted that sit will erode the real returns anytime soon and some even suspect that the growth targets will be a decisive reversal for an economy that had plummeted by an average of 0.7 % each year in nominal terms since the last decade.
The recent monthly survey of the bond-market participating individuals revealed that 72 % of respondents perceived a 2 % inflation which excludes the impact of scheduled consumption tax increase is predicted to happen in the 2016 fiscal year or the subsequent years to follow.
Until such time that economic figures begin to highlight Japan as emerging out of its deflationary difficulties, bond prices will still remain “range-bound”. Moreover, several overseas hedge funds will still push through with their intentions to purchase high-strike options, betting on a surge in longer-term yields 6-7 % but on a lesser aggressive intensity than last year due to the position of Japan no longer attracting traders.