The yearly tally, based on medium- and long-term debt securities, was the highest in comparable data going back to 2005. It topped the level in 2009 when investors liquidated holdings for cash in the wake of the global financial crisis.
The selling momentum has continued into the start of 2023. On Friday, the 10-year JGB yield on the secondary market rose to 0.53%, the highest level since June 2015. It was the first time the market rate went above the Bank of Japan’s new ceiling of 0.5% since the central bank expanded its policy band in the meeting on Dec 20.
Rising short-selling reflects a growing expectation that the Bank of Japan will not continue to hold down 10-year JGB yields for much longer, as well as the increasing importance of foreign investors in a market previously dominated by domestic players.
Net selling hit an all-time monthly high in September at just over ¥6 trillion as central banks overseas took steps toward tightening monetary policy, spurring bond selling that extended to Japan.
December saw the second-highest total on record, with the BOJ’s surprise decision to widen its yield target band fueling expectations of higher interest rates. Fredrik Repton, a Neuberger Berman senior vice president who says he is shorting JGBs, argued that this change could lead to the end of the central bank’s yield curve control policy.
The 10-year yield has stuck close to the BOJ’s new ceiling of 0.5% since Jan 6. The central bank on Thursday bought a single-day record of ¥4.61 trillion in JGBs in an open-market operation.
Of that amount, ¥2.5 trillion was bought through a market operation that purchases an unlimited amount of the 10-year bonds at 0.5% to keep the long-term yield within its band. Breaking the ceiling suggests that some investors were willing to sell the bonds at the price lower than the central bank offered to buy unlimitedly, as they expect further policy shifts in the near future.
The Bank of Japan will hold the year’s first two-day policy meeting on Jan 17 and 18.
BOJ gov Haruhiko Kuroda, who spearheaded the bank’s massive monetary easing programme for a decade, is set to depart in April. “Foreign investors expect the BOJ to end its negative-rate policy and raise rates into positive territory,” said Takafumi Yamawaki of JPMorgan Securities Japan.
JGBs were once held almost entirely by domestic players, helping to insulate the market from turmoil abroad. But this has been changing. Foreign investors’ share of trades involving medium- and long-term JGBs, excluding bond dealers, has risen from around 20% in 2013 to 40% or so now, according to the Japan Securities Dealers Association.
Kazuhiko Sano of Tokai Tokyo Securities estimates that they influence 70% to 80% of the overall market.
“They have a larger presence in areas where they hadn’t had much of one before, like super long bonds” with maturities of 30 years or more, an asset manager at a Japanese insurance company said.
Foreign JGB holdings reached ¥170 trillion at the end of September, BOJ data shows. While only 14% of the outstanding total, this represents a substantial portion of the roughly half not held by the BOJ, ranking behind only insurers.
A QUICK survey in late 2022 found that expectations that foreign investors will drive up yields are the highest they have been since January 2002, when the market was roiled by a bad-loan crisis at major banks.