A $2 Trillion Debt Deluge Means the BOJ Needs to Buy More Bills
(Bloomberg) -- A surge in Japan’s bill issuance is exerting upward pressure on yields and reinforcing the case for the central bank to buy more.Yields on three-month treasury bills rose to -0.06% last week, a level last reached in early 2016 before the Bank of Japan introduced its negative rate policy. Demand from global funds, typically the biggest buyers, has failed to keep pace with supply, prompting the BOJ to step up purchases.The government’s $2.2 trillion stimulus plan has unleashed a flood of bond supply, with issuance set to increase by almost two-thirds in the current fiscal year. While borrowing costs remain low by historical standards, the uptick in yields threatens to infect other parts of the curve and weigh on the nation’s hefty debt burden.“The BOJ may be thinking that it can let the market absorb supply as long as it doesn’t affect yield curve control given debt issuance is likely to decrease next fiscal year,” said Toru Suehiro, senior market economist at Mizuho Securities Co. in Tokyo.The government boosted planned debt issuance to 212.3 trillion yen ($2 trillion) for the fiscal year ending March 2021, to deliver what Prime Minister Shinzo Abe said would be the world’s biggest stimulus. T-bills accounted for almost three quarters of the increase.Global funds haven’t been able to absorb the glut in supply despite buying more.Monthly net purchases by foreign investors averaged 20.8 trillion yen in the second quarter, compared with 17.5 trillion yen a year earlier, according to data from the Japan Securities Dealers Association.More than two-thirds of the nation’s negative-yielding T-bills were owned by global funds as at end-March, based on BOJ figures. These investors borrow yen from their Japanese counterparts at deeply negative rates while lending dollars, earning an extra yield pickup. But ample dollar supply from the Federal Reserve in recent months has capped these premiums.T-bill yields have dipped since Aug. 12, the day the BOJ increased daily purchases by 1 trillion yen to 3 trillion yen.“Bill yields have risen because the basis isn’t favorable for foreign investors,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co. “Given the negative-rate policy, the BOJ couldn’t tolerate a continuous rise in yields, and that’s why it increased purchases.”Local banks also own these bills, and lenders can use them as collateral for yen and dollar loans from the central bank.“Collateral demand for T-bills from banks has declined,” said Souichi Takeyama, a rates strategist at SMBC Nikko Securities Inc. “It all comes down to whether or not the BOJ will increase purchases” to contain a rise in bill yields, he said.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
Bloomberg · 08/19 23:00