JGB vs UST. -JapanAfter the Bank of Japan announced on September 27 that it would conduct an unplanned bond-buying operation with a wide maturity range, Japan’s 10-year government bond yields were up 0.25% above the central bank as JGB yields faced upward pressure from rising global interest rates. fell from the policy limit.
The BOJ said it purchased 100 billion yen of 10- to 25-year government debt and 150 billion yen of 5 to 10-year bonds. BOJ kept its target of -0.1% for short-term interest rates and 0% target for 10-year government bond yield at its September policy meeting.
This resulted in even wider interest rate gaps with the US after the Fed made its third consecutive 75 basis point rate hike at its September meeting and announced further increases to quell rising inflation.
Japan 10Y Bond Yield (percent). Source: Trading Economics
Japan 2-Year Bond Yield (percent). Source: Trading Economics
“The BOJ controls the 10-year yield, but the other maturities are unchecked, so we see a skew in the yield curve, a kind of weird shape,” said Sumitomo Mitsui’s Kichikawa.
-Despite this, 40-year JGB yield rose 8.5 basis points to 1,635, the highest in Refinitiv data going back to 2015.
-30-year JGB’s yield increased 6 basis points to 1,435% for the first time since September 2015.
-20-year yield increased 4 basis points to 1.03% for the first time since December 2015.
-5-year yield increased by 2 basis points to 0.09%, a level not seen since September 2015.
-2-year yield rose 1 basis point to a three-month high of -0.050%.
-United States of America…
The US 10-year Treasury yield reached 3.9% for the first time since April 2010, as expectations of high interest rates to rein in very high inflation continue to dampen appetite for government debt.
The Fed raised interest rates to a target range of 3% to 3.25% at its third consecutive meeting in September, and money markets are now pricing in another 75 basis points increase in November. Policymakers also significantly lowered the 2022 economic growth outlook, expecting a GDP increase of only 0.2% from 1.7% in June.
Meanwhile, 2-year Treasury yields climbed over 4.3% to the highest level since 2007, widening the prior-period deficit and further inverting the yield curve.
US 10-Year Bond Yield (percent)… Source: Trading Economics
US 2-Year Bond Yield (percent)… Source: Trading Economics
Longer-term yield growth and the BOJ’s defense against the 0.25% ceiling… The BOJ, along with keeping the short-term policy rate negative and fixing zero long-term yields, kept moderate wage growth, relatively low core consumer inflation relative to peers, and a fragile it stands alone among developed markets, citing economic recovery.
The BOJ will purchase 100 billion yen ($692.28 million) of 10- to 25-year debt and 150 billion yen of 5 to 10-year securities.
Japan’s bond market is under pressure amid a broad climb in global yields as major central banks, including the US Federal Reserve and the European Central Bank, race to raise interest rates to rein in overheating inflation.
Japan’s central bank maintained its stance last week despite growing policy divergence and pushing the yen to 24-year lows. Japanese authorities intervened in the foreign exchange market for the first time since 1998 to bolster the battered currency.
-The size of the first response…
Tokyo’s bond market started June on a much calmer footing as traders ponder the unprecedented intervention of the Bank of Japan, bringing benchmark yields below their closely watched ceilings.
Ten-year yields rose to 0.23% from mid-June, after the BOJ bought 10.9 trillion yen ($81 billion) of government bonds last week, according to data compiled by Bloomberg. The central bank stepped up its bond buying as benchmark yields exceeded the 0.25% limit tolerated during a global debt sale.
By comparison, asset purchases under the European Central Bank’s APP program averaged $27 billion per month through May this year.
-How much reserves does the BOJ have and how much can it be used?
While intervention could support the yen in the very short term, traders argued that the only way it could meaningfully appreciate over the long term was if Japan’s central bank raised interest rates or the Fed began easing monetary policy. Neither outcome is widely expected.
The $1.2 trillion foreign exchange reserves held by the BOJ are likely to provide a buffer. However, investors stressed that these reserves are limited and provide only a temporary solution.
Karl Schamotta, chief market strategist at Corpay, said: “Even with huge foreign exchange reserves, the Japanese authorities cannot turn the tide. Fundamental performance gaps are increasing interest rate differentials, and the yen is falling for good reason.”
Conclusion? Japanese authorities have been increasing verbal warnings in recent weeks, and the Bank of Japan has made the last move and so-called rate check in the foreign exchange market to warn against speculative betting.
Currency intervention is an extraordinary move for a country that has long been criticized by its trading partners for tolerating and even promoting a weak currency to benefit its exporters. The last time Japan strengthened the yen by direct intervention was during the Asian financial crisis of 1998, when the exchange rate reached 146 and threatened a fragile economy.
Some analysts predict that the BOJ will do more to stop the yen from falling, seeing this week’s intervention as the first of multiple steps.
The joker happens if the BoJ raises the rates. Betting that it would do this was such a bad bet that it became known as the “widow maker” trade. But the monetary intervention was unexpected and raised the possibility of another unforeseen move.
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