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http://www.bloomberg.com/news/articles/2016-03-23/five-fault-lines-...
Shigeki Nozawa
Wes Goodman
richwesgoodman
March 23, 2016 11:01 PM HKT
Updated on March 24, 2016 9:27 AM HKT
24/3/2016 12:04 PM
2 of 4
http://www.bloomberg.com/news/articles/2016-03-23/five-fault-lines-...
Yields on 40-year JGBs dipped below those on 30-year securities Tuesday, and a BOJ operation to buy
long-term notes last week met the lowest investor participation on record. Bond market functionality has
deteriorated, with 41 percent of respondents last month rating it as low, the highest proportion since the
BOJ began the quarterly survey more than a year ago.
It wouldnt be surprising to see some BOJ operations fail, said Yusuke Ikawa, a salesperson at UBS Group
AGs Knowledge Network in Tokyo. The biggest risk of that is in superlong bonds.
A dearth of liquidity has driven a measure of bond-market fluctuations to levels unseen since 1999.
The market has gone from having extremely high liquidity previously, to the point where trading by
investors can easily show up as volatility in yields, said Tatsuya Higuchi, chief fund manager in the fixed
24/3/2016 12:04 PM
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http://www.bloomberg.com/news/articles/2016-03-23/five-fault-lines-...
income investment division at Mitsubishi UFJ Kokusai Asset Management Co. There is a negative side to
the BOJs bond buying.
Demand for JGBs has increased so much since the start of negative-rate policy that its flipped the market
for repurchase agreements on its head: Dealers who in normal circumstances would pay to borrow overnight
cash in the repo market -- offering debt as surety of repayment -- are instead willing to pay to get access to
the collateral.
Distortions in the market are poised to become even more pronounced, with almost 90 percent of analysts in
Bloombergs most-recent survey predicting additional stimulus by the end of July.
The BOJ has already cornered close to a third of the JGB market, more than any other class of investor. That
proportion will grow as asset purchases continue -- even without an expansion of easing.
The central bank is also buying negative-yielding bonds in the market, which has an overwhelming majority
of the worlds sub-zero debt. The benchmark 10-year JGB yielded minus 0.1 percent on Thursday, after
plunging to a record low of minus 0.135 percent on March 18.
The market disruptions raise concerns that the BOJ is nearing the limits of its stimulus, even as Kuroda has
said the central bank can do more. There are also questions over whether, if the central bank is forced to exit
prematurely, the market can withstand the potential shock.
How can the BOJ head for the exit? Dan Fuss, vice chairman of Loomis Sayles & Co., said at an event in
24/3/2016 12:04 PM
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http://www.bloomberg.com/news/articles/2016-03-23/five-fault-lines-...
Tokyo last week. If they open the exit door, theres a fire on the other side.
Before it's here, it's on the Bloomberg Terminal.
24/3/2016 12:04 PM