The Bank of Japan shocked global markets on Tuesday by widening the target range for 10-year government bond yields.
Kazuhiro Nogi | Afp | Getty Images
Global markets were rocked overnight after the Bank of Japan unexpectedly widened its limit Yields on 10-year Japanese government bondsleading to a sell-off in bonds and stocks around the world.
The central bank surprised markets by adjusting its yield curve control (YCC) policy to allow interest rates to hit the market 10 years Japanese Government Bond (JGB) is set to move 50 basis points either side of the 0% target, up from the previous 25 basis points, in an attempt to cushion the effects of prolonged monetary stimulus.
related investment news
In its policy statement, the BoJ said the move is intended to “enhance market forces and encourage smoother formation of the entire yield curve, while maintaining accommodative financial conditions.”
The central bank introduced its yield curve management mechanism in September 2016, aiming to lift inflation towards its target of 2% after a prolonged period of economic stagnation and ultra-low inflation. The introduction of YCC came after the bank ran out of bonds to buy as part of its quantitative easing efforts, and was also in response to yield curve distortions due to negative interest rates.
The BoJ – an outlier compared to most major central banks – left its benchmark interest rate unchanged at -0.1% and pledged to significantly increase its purchase rate of 10-year Treasuries while maintaining its ultra-loose monetary policy. In contrast, other central banks around the world continue to raise interest rates and aggressively tighten monetary policy in an effort to contain skyrocketing inflation.
The YCC change led to the Japanese Yen and bond yields around the world are rising, while equities in Asia-Pacific plummeted. from Japan Nikkei225 fell 2.5% on Tuesday afternoon. The 10-year JGB yield briefly climbed above 0.43%, the highest level since 2015.
U.S. Treasury yields spiked, with the 10 year note up about 7 basis points to more than 3.66% and the 30 year bond increased by approximately 9 basis points to 3.7%. Revenues move inversely to prices.
Stocks in Europe also retreated into the open, with the pan-European Stoxx 600 loss of 1% in early trading before recovering slightly. European government bonds also sold off German 10-Year Bund Yield added nearly 9 basis points to 2.2840%.
‘Test the water’
“The decision is being read as a sign of testing the waters, for a possible withdrawal of the stimulus that has been pumped into the economy to try to boost demand and shake up prices,” said Susannah Streeter, senior investment manager. and market analyst Hargreaves Lansdown.
“But the Bank remains firmly attached to its bond purchase program, claiming that this is just fine-tuning, not the start of a policy reversal.”
That sentiment was echoed by Mizuho Bank, which said in an email Tuesday that the market moves reflect a sudden wave of betting on an aggressive policy pivot from the BoJ, but argued that the “popular bet doesn’t mean that’s the policy reality, or the intended policy perception.”
“The fact is that there is nothing in the fundamental nature of the move or the accompanying communiqué to challenge our fundamental view that the BoJ will calibrate policy to ease JPY pressures, but not become overtly aggressive,” said Vishnu Varathan, head of economics and strategy. for the Treasury Department of Asia and Oceania at Mizuho.
“First, every effort has been made to emphasize that policy adjustment is maintained, whether this related to both the planned and potential increase in bond purchases or whether no further YCC audience expansion has been proposed (for now).
Spikes in volatility
The Bank of Japan noted in its statement that market volatility had increased around the world since early spring, “and this has significantly affected these markets in Japan.”
“The functioning of bond markets has deteriorated, particularly with regard to the relative relationships between bond interest rates of different maturities and arbitrage relationships between spot and futures markets,” it added.
The central bank said that if these market conditions persist, it could have a “negative impact on financial conditions, such as corporate bond issuance terms”.
The Bank expects that the measures decided today will facilitate the transfer of monetary easing effects generated in the context of yield curve management, for example through corporate financing.
“The Bank will strive to achieve the price stability objective by increasing the sustainability of monetary easing within this framework by implementing these measures.”