"After Friday’s rout we have seen a fair amount of volatility in the JPY rate market, and this afternoon that has spread into all parts of the curve, including as of yet insulated short term bonds and swaps. 5y swap 9bp wider today moving from 27bp on Thursday to 45bp today. Similar moves in JGBs where 3y bonds have gone up to 16bp which we were at over a year ago. Swap-spreads too are blowing up.
Feeling is that as this keeps going, VAR models force large holders of short-dated paper (Mega-banks) to hedge or sell. Couple that with extremely diminished liquidity and huge bifurcation of markets between cash, swaps and futures, have to think that Japanese holders of bonds will keep reducing and paying swaps."