Bank of Japan shocks global markets with bond yields

Bank of Japan shocks global markets with bond yields
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The Bank of Japan shocked global markets on Tuesday by widening its target range for the 10-year government bond yield.

Kazuhiro Nogi | Afp | Getty Images

Global markets were rocked overnight Bank of Japan unexpectedly widened his lid 10-year Japanese government bond yieldsleading to the sale of bonds and stocks around the world.

The central bank caught markets off guard by changing its yield curve control (YCC) policy to allow for yields. 10 years old The Japanese Government Bond (JGB) will advance 50 basis points to either side of its 0% target, up from 25 basis points previously, in a move aimed at softening the effects of prolonged monetary stimulus measures.

In a policy statement, the BoJ said the move was intended to “enhance market performance and promote a smoother shaping of the entire yield curve while maintaining favorable financial conditions.”

The central bank introduced the yield curve control mechanism in September 2016 with the intention of raising inflation to the 2% target after a period of prolonged economic stagnation and ultra-low inflation.

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The BoJ – a high benchmark compared to most major central banks – also kept its benchmark interest rate at -0.1% on Tuesday, vowing to significantly increase its 10-year government bond purchase rate and maintaining an ultra-loose monetary policy stance. In contrast, other central banks around the world continue to raise interest rates and tighten monetary policy aggressively to curb high inflation.

Caused by YCC change Japanese new Bond yields around the world will rise, while Asia-Pacific stocks will fall. of Japan Nikkei 225 It closed up 2.5% on Tuesday afternoon. The 10-year JGB yield briefly rose above 0.43%, the highest level since 2015.

In Europe, the US dollar fell 3.3% against the rising Japanese yen in the morning.

US Treasury yields have risen sharplywith 10 year note rose about 7 basis points to just under 3.66% 30-year bond It rose more than 8 basis points to 3.7078%. Incomes move inversely to prices.

European stocks retreated first, along with pan-Europeans Stoxx 600 was down 1% in early trade before recovering most of its losses in the late morning hours. European government bonds were also sold German 10-year bund yield It was down almost 7 basis points from its previous highs to settle at 2.2640%.

“Testing the Water”

“The decision is being read as a sign of testing the waters for a potential withdrawal of stimulus to the economy to test demand and stimulate prices,” said Susannah Streeter, senior investment and market analyst. Hargreaves Lansdowne🇧🇷

“But the Bank remains firmly committed to its bond-buying program, arguing that it is just a fine-tuning, not the start of a policy change.”

The sentiment was echoed by Mizuho Bank, which said in an email on Tuesday that the market’s moves reflected a sudden wave of bets on a dovish policy line from the BoJ, but “a popular bet does not mean the reality of policy or the perception of implied policy.” .

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“The fact is, there is nothing in the core of this move or the accompanying communique that challenges our core view that the BoJ will calibrate policy to reduce JPY pressures, but not be overtly hawkish,” said Vishnu Varathan, head of economics and strategy. . for the Asia and Oceania Treasury Department at Mizuho.

“First, every effort has been made to emphasize that policy has been maintained, whether it has been implied in bond purchases or potential growth, and has not proposed further expansion of the YCC’s target range.”

spikes in volatility

The Bank of Japan said in a statement that market volatility has increased worldwide since the beginning of the spring, “and this has had a significant impact on these markets in Japan.”

“The performance of bond markets has deteriorated, particularly in terms of relative relationships between interest rates on bonds of different maturities and arbitrage relationships between spot and futures markets,” he said.

The central bank said that if these market conditions persist, it “could adversely affect financial conditions, such as the issuance conditions for corporate bonds.”

Luis Costa, head of CEEMEA strategy CitiHe told CNBC there was “absolutely nothing surprising” about the BoJ’s decision, suggesting Tuesday’s market action may have been an overreaction.

“You have to take this BoJ action in the context of dollar-yen positioning, which clearly did not expect this pinch. This is a pinch,” he said.

According to a Reuters poll last week, Japan’s inflation is forecast to be 3.7% annually in November – the highest level in 40 years but still well below levels seen in comparable Western economies.

Costa said the Bank of Japan’s move was not aimed at fighting inflation but addressing “the infrastructure and dynamics of JGB trading” and the volatility gap between JGB trading and the rest of the market.

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