Mar 31, 2023
BlueBay Bets on BOJ Policy Change, Maxes Out Japan Bond Short
(Bloomberg) -- RBC BlueBay Asset Management has increased a bet against Japanese government bonds as it expects the nation’s central bank to abandon its yield-curve control in the coming months.
Mark Dowding, the firm’s chief investment officer, said there are “material gains” to be made once the Bank of Japan removes its cap on long-term rates, which would likely drive bond prices lower. He says such policy change could happen as soon as the BOJ next decision in April, but most likely in June.
Speculation has been growing that Kazuo Ueda, set to helm the central bank from April, will move away from an ultra-loose monetary policy stance as price pressures build up. Japan’s main labor unions won their biggest wage hike in decades in annual negotiations, which could be used as a reason for a change in policy.
“Inflation is proving unpopular in Japan and the BOJ is starting to get blamed for this,” Dowding wrote. “Maximum stimulus was needed to curb deflationary threats, but this is no longer the case.”
BlueBay sees the fair value of the Japanese 10-year bond yield at around 1.25%, a far cry from the lows reached this month under 0.25% as concerns about the health of the US and Europe banks fueled demand for safe assets. The BOJ caps the 10-year rate at 0.5% under its current yield-curve control policy.
The asset manager has previously won on bets that the BOJ would relax its monetary policy. The firm’s short position on Japanese government bonds, which benefited from the BOJ’s surprise move to raise the cap on 10-year yields in December, were now increased to the maximum level allowed by the fund.
On Friday, the BOJ expanded the range of its planned bond purchases next quarter, allowing itself to dial back buying, as upward pressure on yields receded.
Still, the dramatic rally in Japanese bonds this month, exacerbated by traders being stopped out of short trades, is a reminder of the difficulty of timing the trade right.
“JGBs had been a popular short,” Dowding wrote. “Yet, with newsflow in Japan pointing to policy change, we think there is little reason to change views on the evolution of policy.”
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