Investors are favoring Japan's 10-year notes over both shorter- and longer-term debt on prospects the central bank will succumb to lawmaker calls to buy a wider spectrum of debt to support the economy.
The so-called butterfly spread formed by the gaps between 5-, 10- and 20-year bond yields reached negative 15 basis points on April 17, the widest since Feb. 16, two days after the Bank of Japan last increased its debt purchase plan and set an inflation goal. The measure is used to show moves in a yield relative to higher and lower rates. A similar spread for 5-, 10- and 30-year rates in the U.S. was negative 2.6 basis points.
Economic Policy Minister Motohisa Furukawa said on Friday that longer debt purchases is "one idea" for the central bank to consider as it meets this week. Ten-year notes are in the relative sweet spot, according to Tadashi Matsukawa, head of fixed-income securities at PineBridge Investments Japan Co., with short-term securities yielding so little and long-term debt in danger if the BOJ succeeds in sparking inflation. "Five-year securities don't offer enough returns, so investors have no choice but have to buy longer-maturity debt," Matsukawa said. The narrowing butterfly spread "signals a bull market."