Kuroda Vs. The World: BoJ Moves On The 5Y As YCC ‘Mission Creep’ Looms

Dammit no one is really talking about this, but it’s definitely notable.

On both Monday and Tuesday we said that Japan has set its sights on JGB 5Y yields. Basically, the 5Y has become the new frontier in capping 10Y yields.

“It looks like the BoJ may now have to fight to contain 5Y JGB yields, which speaks to the notion that you can’t just cap one maturity when that maturity is itself influenced by other factors,” we wrote first thing Monday morning.

“BOJ battleground for capping yields could be shifting to 2- and 5-year bonds as rising yields for the maturities helped push up those on 10-year securities last week,” Satoshi Shimamura, head of rates and markets for the investment strategy department at MassMutual Life Insurance said earlier this week, adding that “as foreign demand for medium-maturity JGBs shrinks, the 5-year yield climbs above -0.04% level where BOJ held fixed-rate operation in November.” Here’s a look at a 1-month for the 5Y:

(BBG)

Well on Tuesday there was good news on that front as a five-year JGB auction drew a bid-to-cover of 4.85, the highest since August 2014, and up from 4.71 at previous offering on June 8.

“The results of the five-year auction was good, but yields in general remain in an uptrend,” Akio Kato, general manager of Mitsubishi UFJ Kokusai Asset Management’s trading section noted, adding that “the BOJ is expected to stay alert as underlying market sentiment for JGBs remains bearish.”

Fast forward to Wednesday and sure enough, the BoJ increased outright purchases of government notes for 3-to-5 year maturities at its regular operation in an effort to put a lid on medium-term yields. Here are the details from Bloomberg:

• BOJ raises purchase volume of 3-to-5 year notes to 330b yen from 300b yen offered at previous operation on July 5
  • This compares with the July plan to spend about 250b to 350b yen at the 3-to-5 year operation