Written by Junko Fujita and Tom Westbrook
TOKYO/SINGAPORE (Reuters) – Speculators betting on Japan’s historic monetary policy shift are flocking to bets on short-term bonds, expecting potential new deposit rules to disrupt money markets.
Yields on Japan’s one-year Treasury bills were flat until 2023, but under pressure from short sellers they rose by a relatively large 8 basis points in 2024 to the highest level in nearly a decade. It became 0.067%. The six-month yield, which was negative for the first time in eight years, rose well above zero last week.
The positioning is a bet that the Bank of Japan will overhaul its tiered deposit program, which charges financial institutions a demoralizing interest rate of -0.1% on excess reserves, and instead introduce a positive overnight rate. . Investors expect banks to rush to dispose of short-term banknotes and store excess cash at the Bank of Japan.
“The supply and demand situation for short-term government bonds will change dramatically,” said Keita Matsumoto, head of financial institutions sales and solutions at Citigroup Global Markets Japan.
Based on its Yield Curve Control (YCC) policy, the Bank of Japan has guided short-term interest rates to around -0.1%, gradually loosening its grip on 10-year bond yields, and currently setting the soft cap at 1%. .
Investors have been speculating for months that the Bank of Japan would tighten policy, but this time they expected it to raise overnight rates to zero or just above zero, rather than changing the setting of long-term interest rates. ing.
The Bank of Japan’s negative interest rate framework imposes penalties on financial institutions depositing excess reserves with the central bank. Balances are divided into three tiers, with 0.1% on required reserves and zero interest or negative 0.1% on excess balances.
The Bank of Japan’s reserve balance in January was approximately 536.75 trillion yen ($3.63 trillion).
Some of the heaviest bets on the money flowing into these reserve accounts from money market debt are being made in the interest rate futures market.
The final price of a futures contract tied to the Bank of Japan’s overnight call rate TONA, which expires in June, was 100.01, suggesting the overnight call rate will be near zero. Those expiring next September suggest overnight calls could be much higher at 0.0575%.
The call rate as of Thursday was -0.011%.
“The clear difference in how the market hedges against rising interest rates is that the focus is now on when negative interest rates will end,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management.
One-month interest rate swaps also turned positive over the past week, rising to 0.04%.
“Three-month futures prices have already factored in investors’ bets that the Bank of Japan will lift negative interest rates soon,” said Izuru Kato, chief economist at Totan Research.
Over the past eight months, investors have been in a tense standoff with the Bank of Japan, frequently shorting benchmark 10-year bonds to push yields above the ceiling and forcing the central bank to increase the borrowing costs of these bonds in order to stop short selling. has forced the government to raise the
Reuters reported this week that when negative interest rates end, the Bank of Japan is likely to abolish YCC and set overnight call rates as its new policy target.
The two-year Treasury yield, which is highly sensitive to short-term interest rates, hit a 13-year high earlier this week, but the 10-year Treasury yield is far from the 1% ceiling.
The Bank of Japan has promised to intervene if yields rise above that level.
(1 dollar = 147.8000 yen)
(Reporting by Junko Fujita; Editing by Vidya Ranganathan and Sam Holmes)
