The Japanese 10-year bond prices rallied on Wednesday amid following dovish comments made by the Federal Reserve Chair Janet Yellen. Meanwhile, the yield on the benchmark Japanese government 10-year bond, which moves inversely to price, was down 1.2 bps at -0.095 pct.
Moreover, the Fed Chair Yellen at the Economic Club of New York said that caution in raising rates is especially warranted and the Fed has considerable scope for stimulus if needed and the central bank could deploy forward guidance and QE if needed. In terms of the outlook for rates, Yellen reiterated that the FOMC expects gradual rate increases in the coming years but noted that the future rate path is necessarily uncertain.
Moreover, the BoJ's adoption of negative rates in January has driven JGB yields below zero, while also increasing its market volatility.
“The JGB market is really in a bubble, when you think about it as an investment vehicle,” said Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo.
“Their prices have moved away from fundamentals, and people don’t have a traditional way to measure their value,” he added
We expect an expansion of stimulus, and if the market happens to rule out any additional boost in stimulus, that would create an opportunity to go long and we also foresee that the 10-year note will yield about -0.15 percent at year-end.
But the JGB market would be extremely fragile, once Japan's CPI were to rise more than 2% on a year-over-year basis in the near future. At that time, the BoJ would be the most vulnerable victim as the largest holder of JGBs as the central bank has promised that they will continue to buy JGBs even at deep negative yields.
Apart from this, numbers of Japanese corporations are taking advantage of the negative interest rates by issuing long term debt at record low yields. Interestingly, West Japan Railway became the first corporation to issue long-term debt for 40-year.
The material has been provided by InstaForex Company – www.instaforex.com