BOJ Policy Change Fears Sideline Bond Sales With Spreads Rising

(Bloomberg) -- Growing speculation that the Bank of Japan will change its yield-curve control policy again is driving up borrowing costs, prompting a raft of scuppered bond deals. 

Yen corporate bond sales are set to plunge about 70% this month compared with a year earlier to 365 billion yen ($2.8 billion), the smallest issuance volume since 2006, according to data compiled by Bloomberg. Sumitomo Mitsui Trust Holdings Inc. became the latest Japanese issuer to pull an offering, saying on Tuesday it had decided to shelve its planned ten-year note sale due to the market environment. 

The dearth of deals comes as Japanese credit spreads touched their widest since July 2020 earlier this month after the BOJ shocked markets by widening its bond trading band in late December. That move fueled bets on further changes. 

While almost all economists surveyed by Bloomberg expect no change at the BOJ’s two-day policy meeting ending Wednesday, some investors are bracing for more action as the central bank struggles to keep bond yields below its target. 

Another increase in the ceiling for the 10-year government yield is seen as the most likely course of action should the BOJ act, while Bank of America analysts wrote that the market is starting to price in the possibility of policy makers eventually ending its yield-curve control.

Japan’s benchmark 10-year bond yield climbed above the central bank’s ceiling for a third day as traders bet it will further adjust its yield curve control policy.  

Also read: Goldman Says BOJ Could Remove Negative Interest Rate Next

The BOJ’s policy tweak last month, which none of 47 economists surveyed by Bloomberg predicted, sparked a surge in rates volatility. 

“Until we get more clarity on where 10-year government bond yields will be, it’s hard to make investment decisions,” said Shunsuke Oshida, head of credit research at Manulife Investment Management Japan.

But given that almost all Japanese issuers have investment-grade credit ratings, so far market gauges of default risk aren’t reflecting much impact from the BOJ move. If anything, Markit iTraxx indexes show Japan credit-default swaps falling in recent weeks, in line with their Asian counterparts.

Japanese companies, including Nissan Motor Co., are planning to sell about 85 billion yen of notes in the rest of January after issuing around 280 billion yen of debt so far this month, Bloomberg-compiled data show. That total would be a fraction of the 1.18 trillion yen of corporate bonds sold in January last year.

(Updates figure for issuance pipeline in second, final paragraphs. An earlier version of this story corrected the 2023 sales numbers in those paragraphs)

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