According to two government sources who spoke to Reuters, Japan will launch a new kind of floating-rate note that helps investors reduce the risk associated with rising bond yields. This move could signal that policymakers are preparing to raise interest rates even further.
The action is part of the government’s attempts to make sure it can continue selling debt orderly while the Bank of Japan (BOJ) reduces its massive bond purchases and considers further interest rate hikes to almost zero.
The central bank can lower bond prices and raise yields by reducing its bond purchase programme and raising interest rates. Bond prices and interest rates are inversely correlated.
The sources, who spoke on condition of anonymity because they were not authorised to speak publicly, said that the new note will have a short duration and a floating interest rate that would increase in line with market interest rates.
According to the sources, bonds will continue to be a desirable investment option for banks because the floating rate will lessen the potential losses investors might suffer in the event of a BOJ rate hike.
The fixed rates on most government bonds sold in Japan and other countries are generally linked to the cash rate at the time of issuance. Because of the BOJ’s ongoing, extremely loose monetary policy, Japan’s bond market currently offers meager yields.
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