A banker who has spent more than three decades watching Japanese government bonds is bracing for the possibility that long-term yields hit levels unseen in a generation as the central bank moves away from negative rates.
Masamichi Koike, the head of global markets business at Japan’s second-largest lender, Sumitomo Mitsui Financial Group Inc., warns that 10-year yields could triple to 2% should inflation stay above the Bank of Japan’s target, prompting policymakers to eventually lift their short-term benchmark to 1%. The last time overnight rates were that high was in 1995, after the bubble economy burst.
The executive reminisces about the days when profits could be made by purchasing high-yielding bonds and selling them when central banks cut rates. Koike’s instincts on BOJ policy helped him navigate volatility in the wake of its surprise tweak to the yield-curve control in July. He had assigned a more than 50% probability to the move, building positions that delivered a profit for SMFG, which manages 33 trillion in securities, while many other investors were caught on the wrong foot.
Traders are trying to judge the level of yields needed for Japanese buyers to load up at home and offload foreign holdings, potentially setting off a repatriation that could exacerbate this year’s global bond selloff.
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