MW Global yields rise after BOJ surprises with 10-year rate target
Yields on Japanese and U.S. government bonds jumped Wednesday after the Bank of Japan took markets by surprise and introduced a bond-rate target as part of a broader policy revamp aimed at boosting inflation.
The BOJ said it will guide the 10-year bond yield TMBMKJP-10Y, +62.02% to around zero, switching focus to yield curve control rather than its quantitative and qualitative easing program, known as QQE.
To achieve that, the bank will buy bonds if yields start to move up and lend money at a fixed rate if yields start to move much lower. The move was seen as a step to avoid yields plunging into deep negative territory as experienced earlier this year, which had started to hurt the country’s banking sector.
“Ultimately, the introduction of yield curve targeting may spell the death of QQE if the two become mutually incompatible,” said Adam Cole, head of G10 FX Strategy at RBC Capital Markets.
“The ultimate constraint is of course that, whilst the BOJ may have limited the negative side effects of cutting rates further, there is still no guarantee that easing in this way will actually achieve anything,” he added.
The yield on 10-year government paper climbed above zero for the first time since mid-March after the announcement, but pared back a little later in the Japanese session. It ended at minus 0.03%, up around 3 basis points, according to electronic trading platform Tradeweb. The 10-year yield traded at an all-time low of negative 0.3% in July.
With the new 10-year rate target, the BOJ is “guaranteeing that if the banks (or anyone else) buy 10-year bonds at this level, they won’t lose money,” said Marshall Gittler, head of investment research at FXPrimus, in a note.
“Secondly, by preventing 10-year yields from going below zero, the yields of longer-term bonds should stay positive. That will help the profitability of insurance companies and pension funds, which need longer-term assets to match their long-term liabilities,” he added.
The yen USDJPY, -1.06% initially dropped against other major currencies, with the dollar buying as much as ÂĄ102.79 at one point. The yen strengthened later in the session, rising to ÂĄ101.34 against the dollar, compared with ÂĄ101.72 late Tuesday in New York.
The BOJ also said it would continue quantitative easing until inflation exceeds 2% and stabilizes around there, effectively strengthening its commitment to continue aggressive easing. It, however, scrapped its timetable to achieve the target, saying instead it intends to “overshoot” at the “earliest possible time.”
This move “is even more radical, in my view,” said Gittler.
“They’ve committed to overshoot their inflation target. This is the only central bank in the world (that I know of) that has taken such a radical step,” he added.
Elsewhere, yields were also on the rise, with the yield on 10-year U.S. Treasury notes TMUBMUSD10Y, -0.05% trading as high as 1.732% earlier on Wednesday. The rate, however, pared back to 1.691% ahead of the bell, slightly higher than the 1.6787% recorded late Tuesday.
The moves came ahead of the Federal Reserve’s closely watched rate decision at 2 p.m. Eastern Time. The Fed is widely expected to keep interest rates on hold, but investors are looking for hints of whether a December hike is still on the cards.
