The 10-year yield has surpassed the 'belief level' (from Tetsuo Inoue, "Market Trends").

Excerpt from 'Market Trend' published on 2017/02/03 12:44.

 Because the morning stock market decline is attributed to rising interest rates, I am recording an urgent 'Trend'.

This week, the Bank of Japan's Monetary Policy Decision Meeting was held, and what drew attention in Governor Kuroda's Tuesday press conference was the tapering (reduction of bond purchases). For the moment, those concerns were dispelled, but due to the decision to postpone the operation once, the "Bond Village"—the domestic bond desks at banks, life and non-life insurers, and investment trusts (the number being extremely small)—are becoming quite sensitive to BOJ operations.

The BOJ's purchase offer made today at 10:10 consisted of 1 trillion yen in Treasury short-term securities, 70 billion yen in purchases of government bonds with remaining maturities of one year or less, and 450 billion yen in purchases of government bonds with remaining maturities of more than five years and up to ten years; there are two points here.

One is that there were no purchases in the 10- to 25-year range, and none beyond 25 years. The second is that the amount for the 5- to 10-year government bond purchases was 450 billion yen. This 450 billion yen amount was 40 billion yen higher than the first amount of 410 billion yen earlier this month, yet it was the same as the 450 billion yen on 1/27, so the villagers seem to feel 'disappointed'. If, for example, it had been 470 billion yen, or even slightly higher than the 1/27 amount, I think the story would have been different.

And now, what the villagers are whispering about is the "overvaluation of the 10-year zone." The near-0.1% yield, viewed forward, appears to be overvalued when compared with longer-dated government bonds. In fact, in yesterday's auction, the tail—the gap between the average bid price and the lowest bid price—was 5 sen, higher than the previous typical 3 sen. (This widening of the tail is called 'tail flows', and market participants dislike bonds, judging them to be unpopular.)

However, this is not something that started now; it has been ongoing for a long time. Even when considering liquidity, etc. (for illiquid assets there is a gap between offer and bid, and you can't sell at your desired price, but for 10-year bonds that gap is small; in other words, there is liquidity), it is clear that the scale does not fit.

From here on, to the main part of 'Market Trend' ↓