BLUEBAY Asset Management is gearing up for battle with the Bank of Japan.

As the BOJ escalates attempts to keep a lid on bond yields, BlueBay is betting the central bank will be forced to abandon a policy that’s increasingly out of sync with global peers. The BOJ’s so-called yield curve control is “untenable,” according to Mark Dowding, BlueBay’s London-based chief investment officer.

“We have a sizable short on JGBs,” Dowding, whose firm oversees about $127 billion across hedge funds and other fixed income products, said in an interview on Monday.

Traders are increasingly testing the BOJ as soaring inflation drives up bond yields around the world. Dowding joins other market veterans such as former Goldman Sachs Group Inc. chief currency economist Jim O’Neill and JPMorgan Asset Management’s Seamus Mac Gorain in predicting the BOJ will eventually alter its stance on yields, just as Australia’s central bank did last November.

Yields on 10-year Japanese bonds breached the upper end of the BOJ’s target on Monday and have remained at elevated levels even after the central bank accelerated its planned bond-purchase operations and included longer maturities.

“The last man standing continues to be the BOJ and to be honest the more the market attacks the Fed and the ECB the more likely it is that the BOJ own forward guidance (in the form of YCC) will end very messily with huge implications for global rates,” Deutsche Bank macro strategist Jim Reid wrote in a note to clients on Tuesday.

Ten-year yen swap rates have also surged, breaking their close relationship with domestically driven yields. At over 0.50%, the former have pushed well past the central bank’s 0.25% ‘line in the sand’ for benchmark bonds, suggesting international traders believe higher yields and a policy change in Japan are inevitable.

There is “little downside to being short Japan rates via futures or yen swaps,” Dowding said. “Yield curve control is designed so that the more the Fed hikes, the more the BOJ is going to need to ease and grow its balance sheet. This is what makes it untenable.”

For now, Japan’s policy makers are defending their yield target. The central bank boosted scheduled purchases of five-to-10-year debt to 800 billion yen ($6 billion) Tuesday from an expected 500 billion yen after the benchmark yield climbed to 0.255%. It also announced an unscheduled operation to buy longer-dated debt after the 30-year yield surged to 1.28% — the highest since 2016.

The yen tumbled to a 24-year low of 135.19 per dollar on Monday amid the growing policy divergence between the BOJ and the Fed. The Japanese currency traded at around 134 on Tuesday.

Swaps traders ramped up their bets on higher rates since BOJ intervened

“We do think that the BOJ will be forced to capitulate at some point,” Russel Matthews, senior portfolio manager at BlueBay, said in an interview with Bloomberg Television.

Japan’s central bank bought 2.2 trillion yen worth of government notes through its fixed-rate operation on Tuesday, the biggest amount on record since the program began in 2016.

BlueBay started shorting Japan’s sovereign debt when the yen slid close to the 130 per dollar level several weeks ago, Dowding said. “Once yields move after a change, then we will look to take profits,” he said. – Bloomberg