(Bloomberg) -- A fund manager at Amundi is scaling back a winning trade betting against Japanese government bonds even though he expects the central bank to eventually abandon its policy of keeping yields anchored.

Shorting the securities has becoming ever more complicated to maintain, said Gilles Dauphine, head of alpha euro fixed income at Amundi. The Bank of Japan has had to resort to buying record amounts of bonds to defend its so-called yield-curve-control policy in recent weeks to cap the 10-year yield below 0.5%.

Instead, Dauphine is wagering that the yen stands to benefit as the market waits for the BOJ to capitulate. “It’s probably easier to play the Japanese currency,” he said. Shorting government bonds is “a different game now.”

Investors are puzzling over how best to profit from further BOJ shifts in what has emerged as a major macro trade for 2023, arguing that the current policy of yield-curve control is unsustainable. Trading in some of the notes has become so illiquid due to the BOJ’s large-scale purchases of government bonds that they’ve been removed from a major index. 

Any easing of yield-curve control could benefit the yen, as higher yields narrow the interest-rate differential with other countries’ debt. 

The Japanese currency has already rallied 16% against the dollar from a three-decade low in October. Furthermore, leveraged accounts turned the least bearish on the currency since February 2021, according to data from the Commodity Futures Trading Commission through Jan. 17.

The yen got a boost in early trading Friday after data showed inflation in Tokyo outpaced expectations, keeping the focus on possible BOJ policy tweaks.

Exiting Yield Control

Short rates plays, meanwhile, are proving challenging. Dauphine said questions over the fair value for Japanese government bond yields and the behavior of domestic investors are stoking uncertainty.

“The question is if YCC disappears and monetary policy doesn’t move, where do you see the 10-year JGB, at what level do you see it clearing?” said Dauphine. 

Investors are assessing the likely path for Japanese yields once yield-curve control is removed, taking into account the state of the economy and the impact of the BOJ’s purchases. Amundi have a 12-month target on the 10-year rate of around 0.6% to 0.8%. 

Separately, Morgan Stanley strategists said that the BOJ’s long-term funding supply operations could also deter traders from taking rates bets, as the policy encourages banks to arbitrage using interest-rate swaps or by buying government bonds, pushing down yields. That could pose difficulties for investors looking to bet on higher rates. 

The central bank announced another five-year loans-for-bonds offer on Friday, to take place on Jan. 31.

Amundi also previously had a trade involving longer-dated JGBs, which came with its own idiosyncratic challenges. Demand for long-dated bonds from insurers looking to hedge their liabilities can pressure yields at that part of the curve, according to Dauphine.

In contrast “on the Japanese yen, there are things to do for sure,” said Dauphine. 

(Updates with Friday’s loans-for-bonds offer. A previous version corrected the bond buying scope in the second paragraph.)

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