Bonds around the world fell as the Bank of Japan, the only major central bank not to have begun reversing ultra-easy monetary policy, surprised investors by loosening its control of market rates.
(Bloomberg) — Bonds around the world fell as the Bank of Japan, the only major central bank not to have begun reversing ultra-easy monetary policy, surprised investors by loosening its control of market rates.
Having previously capped bond yields at 0.5% in a bid to stoke borrowing and its economy, the central bank said today it now regarded that level as a reference point rather than a rigid limit.
The move sent Japan’s 10-year yield to the highest level since 2014, amid speculation it marked the first step towards the end of extraordinary stimulus after the recent surge in inflation. It also triggered big swings in the yen, sending it as much as 1% higher at one point against the dollar.
Markets elsewhere reacted to the possibility that higher yields at home will persuade Japanese investors, who own sizable amounts of US, European and Australian bonds, to reduce overseas debt holdings.
US Treasury yields held near 4%, having risen sharply late Thursday after a Nikkei news report that Japan was poised to tweak its yield-curve control policy. The equivalent rate in Germany increased as much as 5 basis points, and Australia’s climbed 20 basis points at one point.
“This is a big week as it signals we are pretty much at the end of hiking cycles globally,” said Peter Kinsella, head of currency strategy at asset manager Union Bancaire Privee UBP SA.
The “BOJ is effectively saying the top of the yield range is now 1% so that implies 50 basis points in potential steepening. So it’s slow gradual normalization, but yes, it’s normalization BOJ style,” he added.
The BOJ pledged to show more flexibility over its yield curve control policy, though governor Kazuo Ueda insisted the bank was still far from the point where it could raise rates. Japan’s 10-year yields jumped as much as 13.5 basis points to 0.575% after the decision, above the BOJ’s earlier cap of 0.5%.
The yen ceded most of its earlier gains, but is still headed for its best month since March, with gains of almost 3.5%.
“The BOJ decision is an invitation to short dollar-yen,” said Kenneth Broux, currency strategist at Societe Generale SA. “Higher Japanese yields reduce the spread versus US Treasuries and German bunds.” He added however that dollar downside could be limited, given Thursday’s strong US data that could imply further Fed tightening.
In stock markets, the busiest week in the earnings calendar was drawing to a close, with sentiment supported by forecast-beating results and conviction that interest rates in the US and euro zone are near their peak. European stocks edged lower, but were still set for their third straight weekly gain
Among individual movers, Hermes International rose 2% in Paris after reporting robust sales for its high-end handbags. Standard Chartered Plc jumped 5% after announcing a $1 billion stock buyback.
In the US, contracts on the Nasdaq 100 rose 0.6%. Intel Corp. shares rose 8% in pre-market trading after the chipmaker gave a bullish revenue forecast. Its report follows positive quarterly earnings from the likes of Meta Platforms Inc. and Microsoft Corp.
More Comments on BOJ Move
Shinichiro Kadota, FX strategist, Barclays Securities Japan
“The latest BoJ action (and expectations thereof) are driving JPY to rebound toward short-rates-implied levels against major currencies, and we see scope for some further near-term gains. We have previously estimated that YCC removal is worth 3-5% yen appreciation against the USD. However, it will likely need policy-rate normalization for a more-sustained BoJ-driven rally.”
Masamichi Adachi, economist, UBS Securities Japan
“This is ‘de-facto’ abolishment of YCC, at least for the time being. No introduction of the policy rate guidance suggests that the Bank left open the near-term policy rate hike optionality, in our view.”
Jim Reid, strategist, Deutsche Bank
“They won’t be able to defend 0.5% now, absent a macro development that structurally lowers yields. 10yr JGBs have increased to 0.56 bps, their highest since 2014, and all other things being equal this should continue to creep up in the days and weeks to come and removes an anchor for global yields.
Michael Cahill, Economist, Goldman Sachs International
“The BoJ has communicated that this latest change was made in order to make the policy more ‘sustainable,’ and in any case represents a more gradual change than shortening the target or eliminating the policy altogether would have entailed. While we could see some further JPY strength in the coming days as the market explores the parameters of the BoJ’s new-found flexibility, we have previously argued that our macro forecasts of solid US growth and stickier Fed policy are not conducive to substantial or sustained Yen appreciation, and in fact point slightly in the other direction. Today’s more gradual BoJ adjustment helps reinforce that view.”
Key events this week:
- Eurozone economic confidence, consumer confidence, Friday
- US consumer income, employment cost index, University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
- The Stoxx Europe 600 fell 0.2% as of 10:46 a.m. London time
- S&P 500 futures rose 0.4%
- Nasdaq 100 futures rose 0.8%
- Futures on the Dow Jones Industrial Average rose 0.2%
- The MSCI Asia Pacific Index rose 0.5%
- The MSCI Emerging Markets Index rose 0.5%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.0971
- The Japanese yen rose 0.1% to 139.30 per dollar
- The offshore yuan rose 0.1% to 7.1604 per dollar
- The British pound rose 0.1% to $1.2815
Cryptocurrencies
- Bitcoin was little changed at $29,155.91
- Ether rose 0.3% to $1,864.42
Bonds
- The yield on 10-year Treasuries declined two basis points to 3.98%
- Germany’s 10-year yield advanced two basis points to 2.49%
- Britain’s 10-year yield advanced four basis points to 4.35%
Commodities
- Brent crude fell 0.5% to $83.85 a barrel
- Spot gold rose 0.3% to $1,951.62 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Rob Verdonck, Nurin Sofia, Iris Ouyang and Tassia Sipahutar.
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