Bank of Japan shocks global markets with bond yield shift

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

Kazuhiro Nogi | AFP | Getty Images

Global markets were shaken overnight after the Bank of Japan unexpectedly widened its cap on Japanese 10-year government bond yieldstriggering a sell-off in bonds and stocks around the world.

The central bank caught markets off guard by changing its yield curve control (YCC) policy to allow yield 10 years Japanese government bonds (JGBs) will move 50 basis points either side of their 0% target, from 25 basis points previously, in a bid to cushion the effects of prolonged monetary stimulus .

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In a policy statement, the BoJ said the move was aimed at “improving market functioning and encouraging smoother formation across the yield curve, while maintaining accommodative financial conditions.”

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

The BoJ – an outlier compared to most major central banks – also left its benchmark interest rate unchanged at -0.1% on Tuesday and pledged to significantly raise the rate of its bond purchases. of State to 10 years, while maintaining its ultra-accommodative monetary policy. In contrast, other central banks around the world continue to hike rates and aggressively tighten monetary policy in an effort to contain skyrocketing inflation.

The YCC change prompted the japanese yen and bond yields around the world rose, while stocks in Asia-Pacific fell. from Japan Nikki 225 was down 2.5% on Tuesday afternoon. The 10-year JGB yield briefly climbed to over 0.43%, its highest level since 2015.

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US Treasury yields jumpedwith the 10 year ticket climb about 7 basis points to exceed 3.66% and the 30 year bond up about 9 basis points to 3.7%. Yields move inversely to prices.

Equities in Europe also fell in the open, with the pan-European Stoxx 600 losing 1% at the start of the session before recovering slightly. European government bonds were also liquidated, The 10-year yield of the German Bund adding nearly 9 basis points to 2.2840%.

“Test the Water”

Volatility peaks

The Bank of Japan noted in its statement that since the beginning of spring, market volatility around the world has increased, “and this has significantly affected these markets in Japan.”

“The functioning of bond markets has deteriorated, particularly in terms of relative relationships between interest rates of bonds of different maturities and arbitrage relationships between spot and forward markets,” he added. .

The central bank said if these market conditions persist, it could have “a negative impact on financial conditions such as corporate bond issuance terms.”

Luis Costa, head of CEEMEA strategy at Citi, indicated on Tuesday that the market move could be an overreaction, telling CNBC that there was “absolutely nothing surprising” in the BoJ’s decision.

“You have to take this action from the BoJ in the context of dollar-yen positioning which obviously didn’t expect this adjustment. It’s an adjustment,” he said.

Japanese inflation is expected to hit 3.7% a year in November, according to a Reuters poll last week – a 40-year high, but still well below levels seen in comparable Western economies.

Costa said the Bank of Japan’s decision was not focused on fighting inflation, but on “the infrastructure and dynamics of JGB trading” and the volatility gap between JGB trading and the rest of the market.

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