TOKYO- Japanese policymakers are considering a 50-year government bond issue as a long-term means of putting a floor under super-long interest rates, sources say.
Selling such bonds – a hot topic after Bank of Japan Governor Haruhiko Kuroda commented on the idea this month – would allow the government to lock in cheap long-term funding and give yield-starved investors higher returns.
It could also offer the BOJ a new tool for its “yield-curve control” (YCC) policy by helping prevent excessive declines in super-long bond yields, which hurt returns of pension funds.
There no immediate plans to issue such bonds in Japan, but the Ministry of Finance has long considered the idea, holding hearings with market participants three years ago, a finance ministry official told Reuters.
That plan was turned down because investor demand was scarce, finance ministry officials say.
“It has not been ruled out completely and could be an issue to consider in the long run,” another ministry official said.
Adding 50-year bonds could drain liquidity from markets of other super-long bonds, making yields vulnerable to wild swings, MOF officials say. It is also unclear whether 50-year bonds would be traded much, as investors could suffer huge losses if yields spike.
The BOJ is also scrutinizing how issuing more long bonds could affect its YCC policy, which aims to control the shape of the yield curve, say sources familiar with its thinking.
“If the government issues more super-long bonds or starts selling 50-year debt, that could help steepen the yield curve,” one of the sources said.
The ministry officials and sources familiar with the central bank’s thinking spoke on condition of anonymity because they are not authorized to speak to the media.
Long bonds have drawn global attention as countries try to use super-low rates to lock in debt. Some European countries have sold 100-year bonds, a move Treasury Secretary Steven Mnuchin said the United States could also consider.
Japan, too, has fans of long bonds among politicians eager to boost spending.
BOJ Governor Kuroda caused a stir by saying this month that if the government were to issue 50-year bonds, it would help prevent excessive declines in super-long yields.
Finance Minister Taro Aso said days later that Japan may consider issuing such bonds.
Liquidity for 40-year government bonds – the longest maturity sold in Japan – remains low, making up just 2.4 percent of the outstanding balance of Japan’s government bond market.
And some BOJ officials doubt whether 50-year bonds would help steepen the yield curve, the sources familiar with the central bank’s thinking say.
As super-long bonds are traded among a handful of insurers and pension funds, issuing 50-year bonds may simply drain money from other maturities and distort the curve in the wrong direction, they say.
If demand for 50-year bonds proves unexpectedly strong, the government could issue them at very low yields. That could push down yields for other super-long bonds.
The BOJ may have few other tools to set a floor under yields beyond slowing bond purchases.
It is already tapering its bond buying steadily, though analysts wonder how long it can keep 10-year yields from sliding well below its 0 percent target.
The central bank could sell its bond holdings, but not without repercussions. Having gobbled up nearly half of Japan’s government bond market, even subtle hints that the bank was unloading bonds could spark a huge market sell-off.
“Selling bonds is theoretically possible,” a third source said. “But it’s not something the BOJ can do easily because the impact is so hard to predict.” – Reuters