After today's US Treasury rout which sent the 10Y yield as high as 3.20%, all eyes have turned to Japan where the BOJ has been already actively signaling it is tapering purchases on the long end following a couple of announcements that it is shrinking the size of the 25 year+ rinban bucket.
And sure enough, it didn't take long for JGBs to get routed, with the 10Y bond yield first rising to 0.145%, the critical support level that was hit on August 2 when when Japanese bonds were sent on a wild rollercoaster ride, culminating with the BOJ surprise offer to buy JPY 400BN worth of bonds. And as panicked traders looked on, hoping for some Kuroda to step up, there was no intervention tonight, and predictably yields resumed moving higher, rising as high as 0.153%.
This was the highest yield since January 2016.
This was the highest yield Today's push higher in Japanese yields also came after 10-year debt rolled over to a new benchmark following an auction Tuesday and amid continued selling pressure for long-end JGBs ever since the BOJ unexpectedly cut buying in bonds due in more than 25 years on Sept. 21.
Commenting on the morning's move, Toru Suehiro, senior market economist at Mizuho Securities in Tokyo said that Japan’s bond yields are entering an "uncharted territory."
According to Suehiro, the only limiting factor on tonight's bond rout out is the expectation that the BOJ may intervene, otherwise yields could have risen more considering the sell-offs in Treasuries. The strategist said that should the central bank decide to step into the market on Thursday, it’s probably "safe" for BOJ to conduct an unscheduled normal purchase operation - the same one it did on August 2 - rather than a fixed-rate buying which could get market participants too fixated on a certain level.
Pouring cold water on intervention expectations, however, Bloomberg points out that a working paper published on the BOJ’s website earlier this week said the amount of government bonds that the central bank holds is more important than periodic purchases in determining term premiums, in other words the old "stock is more important than flow" argument. This is in line with the BOJ’s recent move to make its tapering less stealthy.
And while the Mizuho analyst is confident that even if there’s no operation, "the market is unlikely to sell into a steep sell-off" although we disagree, and the higher in "uncharted" territory yields go without a BOJ intervention, the faster the selling, until the benchmark 10Y yield hits the BOJ's 0.20% upper barrier. What happens then is unclear, because with the BOJ already engaging in tapering and contemplating normalization of the bond market, it will be forced to defend the bond market just as local and foreign institutions finally press the central bank, testing its true resolve - and capability - to defend the Japanese bond market from a full blown collapse.
Meanwhile, as Bloomberg's Mark Cranfield notes, "Kuroda isn't suddenly going to turn into a policy hawk", so JGB yields will only drift higher amid a regular dose of dovish comments when he speaks to Japan's parliament. As such, curve steepening at the super-long sector is likely to be the most visible sign bond bears are in charge.