(Aug 19): Global funds and relative-value traders are driving a surge in Japan bond futures trading in Singapore, drawn by rising volatility.

Trading of 10-year Japanese government bond (JGB) futures at the Singapore Exchange (SGX) has increased sixfold in 12 months, with the daily average volume climbing to 5,400 contracts this month. That represents about ¥54 billion (US$338 million or RM1.38 billion) in notional value traded per day, according to the exchange.

It remains a fraction of the more than ¥4 trillion of 10-year JGB futures traded daily in Japan, according to data compiled by Bloomberg. But interest is growing as investors grapple with the prospect of further Bank of Japan interest-rate hikes, inflation and fiscal risks, including the impact of Prime Minister Sanae Takaichi’s spending plans, William Chin, the SGX’s head of rates, derivatives, said in an interview.

The yen’s role as a global funding currency and Japanese investors’ vast overseas holdings also mean swings in its markets can ripple through global portfolios.

“Ultimately all this produces volatility, be it on the yen side, be it on the rates side,” Chin said. “When there’s volatility, there’s trading opportunity.”

Trading volume surged to as many as 9,000 contracts on one day last week, according to the SGX. The exchange expects activity to grow and is focused on building liquidity in its 10- and 20-year offerings before potentially adding a 30-year contract. 

“The Japanese rates market is going to be a lot more colourful in five to 10 years’ time than where it is right now,” Chin said.

Uploaded by Tham Yek Lee