(Bloomberg) -- Pacific Investment Management Co.’s Japan unit expects the central bank to raise rates again as early as January and is ready to actively invest in ultra long-term government bonds, which have seen their yields rise to more attractive levels.
Despite geopolitical uncertainties and financial market instability in August, the Bank of Japan’s approach to normalize monetary policy has not changed, and “the next rate hike will be as early as next January,” said Tadashi Kakuchi, a portfolio manager at Pimco Japan Ltd., in an interview.
Japanese government yields remain in an upward trend, which was reinforced by inflation data for Tokyo last week that showed rising prices in August continue to support the case for the BOJ to normalize monetary policy. The tepid result of an auction of 10-year bonds on Tuesday also added to the sense that yields will climb further.
The forward interest rate on super long-term bonds exceeded 3% for the first time since the BOJ’s radical quantitative easing started in 2013. The yield curve is still steep and there are “no duration needs” to buy longer-dated government bonds, Kakuchi said. “This is an opportunity to take a little bit of risk.”
The supply-demand balance for super long-term bonds is deteriorating as weak investment is combined with the BOJ’s reduction of JGB purchases. The Ministry of Finance has also begun to consider shortening the maturity of JGB issuance, though Kakuchi says there will be improvement in about six months and an increase in demand could lead to stability across the bond market.
Although volatility has calmed down recently, it “will remain higher than before the BOJ started policy normalization,” he said. “For those of us who are active managers, volatility is better than no volatility.”
(Updates with uptrend in JGB yields, recent inflation data and bond auction on Tuesday.)
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