JGBs are relatively cheap; BoJ could widen or lower the 10-year JGB target range - DBS Bank

The DBS Bank in its latest research report said that the Japanese government bonds (JGBs) are not cheap, but cheaper. Because of the control posed by Bank of Japan's Yield Curve Control (YCC) policy, yields have slumped much less and slopes have flattened much less compared to elsewhere.

Year to date, within G10 countries, JGB yields have fallen the least. The 10-year JGB yields are 27 basis points lower vs peer average of 97bps; 2Y/10Y JGB slope is 12bps flatter vs peer average of 42bps, the report added.

At the time of writing, the yield on Japan’s benchmark 10-year note, which moves inversely to its price, fell to at -0.265 percent down from August high of -0.130 percent, the yield on the long-term 30-year bond hovered at 0.140 percent while the yield on short-term 2-year traded at -0.287 percent by 04:00GMT.

The bank further noted that the window of opportunity to lock in relatively high JGB yields could be closing though. 10Y yields have been trading below the -0.20% lower bound of YCC target range since August 9.

The BOJ has tried to defend the bound by reducing its purchases, but the downward pull on JGB yields by global yields has proved to be too strong. At its upcoming policy meeting on September 19, the BOJ could widen or lower the 10Y JGB target range, which could see yields gap lower, possibly by 5-10bps, DBS’s Philip Wee noted.

“Global sovereign bonds are pricing in a worrying global economic outlook and a decent amount of monetary easing ahead. Thus, valuations are likely to be fairly rich unless one assumes that the global slowdown is going to worsen considerably from here, in which case would warrant central banks to ease aggressively. In such a challenging environment where there is not a lot of value to be found, investors can consider bonds that may not be cheap, but that are cheaper,” DBS reported.