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Bloomberg View

Volatility in Japan’s bond market was second only to Greece in the past 10 days, as diverging policies of global central banks create financial turbulence.

Historical price swings for Japanese government bonds maturing in 10 years or more surged to 10.359 percent yesterday in Tokyo, the highest in 19 months, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies. Those for Greek bonds were at 23 percent. The Bank of Japan’s expansion of record stimulus at the end of last month means it is set to buy more than 60 percent of the debt the government plans to issue this fiscal year.

Longer-dated debt is losing its appeal as volatility returns to the world’s lowest-yielding debt market after Switzerland, according to Prudential Investment Management Japan Co. Federal Reserve Chair Janet Yellen said last week policy normalization could lead to some heightened financial volatility, while Bank of England Governor Mark Carney said the transition could be “bumpy.”

“Japan’s super-long bonds which were and will be most affected by additional BOJ easing had relatively large swings,” said Kenji Sakaguchi, the chief investment officer in Tokyo at Prudential Investment Japan, which managed 15.3 trillion yen ($133 billion) at the end of June. “Considering the rise in volatility, the risk-returns for 30-year and 40-year bonds don’t justify buying at these levels at the moment.”

Price Swings

The gauge of 10-day price swings in long-term JGBs surged to 18.785 percent after the BOJ’s initial introduction of unprecedented monetary stimulus on April 4, 2013. The benchmark 10-year yield more than tripled in less than two months from a record low 0.315 percent to as high as 1 percent. It rose one basis point to 0.465 percent today.

“There is less incentive to sell JGBs than last year,” said Shinji Hiramatsu, a senior investment manager at Sompo Japan Nipponkoa Asset Management, which oversees the equivalent of $9.8 billion. “Some investors are hesitant to recklessly sell having seen yields rise last year only to fall back down.”

BOJ Governor Haruhiko Kuroda on Oct. 31 unexpectedly increased purchases of JGBs to an annual pace of 80 trillion yen and extended the average remaining maturity of its purchased debt to seven to 10 years from about seven.

MassMutual Life Insurance Co. estimates the BOJ’s buying of JGBs maturing in more than 25 years will quadruple, making up about 61.5 percent of planned issuance in the securities this fiscal year. That’s still the lowest ratio compared with other tenors, said Satoshi Shimamura, the Tokyo-based head of rates and markets at the investment-strategy department of MassMutual.

Pendulum Swing

“Yields on super-long bonds will swing like a pendulum after the surprise increase in the BOJ’s buying on the one hand and the relatively low ratio of purchases of those notes on the other,” when compared with the central bank’s buying of shorter-term debt, he said.

The expansion of easing was as significant in its scale and impact as the original stimulus announcement 19 months earlier, Sachin Gupta, executive vice president at Pacific Investment Management Co. and Tomoya Masanao, the head of portfolio management for Japan, wrote in a report on the company’s website on Nov. 7.

The “audacious” easing will drive down yields on longer- maturity JGBs, meaning such securities will offer greater returns than shorter-dated debt in the near term, they wrote.

The premium 20-year notes offer over 10-year securities narrowed to 75 basis points on Nov. 4, the least since April 2013, according to data compiled by Bloomberg. The yield spread widened to 77 basis points as the 20-year yield climbed six basis points from a 19-month low of 1.17 percent on Nov. 4. A basis point is 0.01 percentage point.

Currency Volatility

The BOJ’s move also caused fluctuations in the currency market. Implied volatility on one-month options for the dollar- yen climbed to 11.4575 percent on Nov. 6, the highest since October 2013. The measure is used to set option prices and gauge the expected pace of currency swings. The average this year is about 7.2 percent.

The yen traded at 114.75 per dollar as of 10:10 a.m. in Tokyo after reaching 115.59 on Nov. 7, the weakest since November 2007. Currency depreciation tends to boost inflation through higher import costs.

Consumer prices excluding fresh food and the effects of April’s sales tax increase rose 1 percent in September from a year ago, half of the BOJ’s 2 percent target. Prime Minister Shinzo Abe is due to decide by the end of the year whether to raise the consumption levy to 10 percent in October 2015.

Market Pressure

Divergence in monetary policies around the world when the Fed tightens, while other central banks stick to their easing measures, will “place pressure” on financial markets, especially currencies, Mohamed El-Erian, the former chief executive officer of Pimco and now an adviser to Allianz SE, said in Paris last week.

“Volatility will probably remain high for some time,” said Satoshi Yamada, a manager of debt trading in Tokyo at Okasan Asset Management Co., which managed 1.5 trillion yen at the end of December. “The BOJ needs to continue its communication with market participants about its buying operations to avoid swings in JGBs. If the current volatility persists, super-long bonds will be quite risky.”