(Bloomberg) -- Japanese bond traders just had a taste of what it’s like when the nation’s central bank and pension fund aren’t there to support them.
Bond futures tumbled by the most since 2016, triggering margin calls for investors, after the worst 10-year debt auction in three years. Yields across the curve climbed, while the sell-off also spilled into Treasuries and European debt.
Behind the sudden collapse lies the Bank of Japan’s decision to potentially slash bond purchases in October, and an announcement that the Government Pension Investment Fund is pivoting toward buying more foreign debt. All of a sudden, investors were left wondering what other changes were in store.
“The BOJ’s operation change had a huge psychological impact,” said Eiji Dohke, chief bond strategist at SBI Securities in Tokyo. “Investors are reluctant to buy given the risk of the BOJ skipping a purchase.”
Futures of 10-year notes slid as much as 0.97 yen to 154.05. The auction of 10-year debt drew a bid-to-cover ratio of 3.42, the lowest since 2016, with the cut-off price of 102.33 falling short of the 102.64 estimated by traders.
Japanese sovereign bonds were already reeling from September, when they lost 1.1%, the first monthly decline since April, according to a Bloomberg Barclays (LON:BARC) index.
The BOJ on Monday slashed purchase ranges for four major maturities, and indicated it may even stop buying debt of more than 25 years. It also suggested that it could skip buying operations as needed as it sought to steepen the yield curve.
Yields on Japan’s 10-year cash bond rose 6 basis points to minus 0.15%. They also climbed 7 basis points for Treasuries with a comparable maturity, while U.K. gilt yields rose 6 basis points.
While investors are waiting for the central bank’s first bond purchase operation for this month on Friday, they also have to assess the long-term implications from GPIF’s announcement Tuesday.
The world’s largest pension fund said it will consider currency-hedged overseas bond holdings as similar to domestic debt investments. That will allow GPIF to buy more foreign debt, as it’s already close to the 19% limit in its current mandate.
Takahiro Sekido, a strategist at MUFG Bank Ltd., estimated GPIF may allocate more than 30% of its existing JGB holdings to currency hedged-foreign bonds.
“There could be many funds following GPIF’s allocation change,” said Sekido, a former BOJ official. “Japanese bonds have reached the point where it’s almost impossible to buy.”
