Update: as some expected, moments after the rout in JGBs this morning in Japan, the BOJ announced it would hold its first Fixed-Rate operation since February, offering to buy an unlimited amount of 10Y JGBs at 0.11%.
- BOJ HOLDS FIXED-RATE OPERATION FOR FIRST TIME SINCE FEB;
- BOJ OFFERS TO BUY 10-YR NOTES AT O.11% AT FIXED-RATE OPERATION
While JGBs have regained some of their losses…
… there has barely been a move in the USDJPY which is already back to where it was before the announcement.
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In a delayed reaction from a Friday evening report by Japan’s JIJI, since confirmed by Reuters, that the BOJ is considering a shift in policy to potentially push 10Y yield wider, and which as we reported on Friday sent JGB futures sliding, the Monday opening of JGBs has been a shock to the system, sending the 10Y yield on Japanese government bonds surging to 0.80%, the highest since February.
Meanwhile, the USDJPY which just last week hit 113, has continued to slide and is now back under 111, catching countless traders who had positioned for further Yen weakness offside – the most recent CFTC COT report showed that short yen positioning was the dominant view last week – and forcing a sharp short squeezes.
For those who missed it, according to media reports last Friday, the BOJ is set to launch a full-scale investigation to mitigate the side effects of its yield-curve control policy on bank profitability and government bond trading, which we said suggests that the BOJ may seek to “kink” the curve to the left of the 10Y in hopes of achieving a “beautiful steepening” to roughly paraphrase Ray Dalio.
Like in Europe where between NIRP and QE the yield curve has been so flat has been hurting bank profitability (with some bank, most notably Deutsche Bank complaining vocally about the ECB’s policies) similar concerns have spread in Japan where both banks and pension funds have been agitating for at least some yield curve steepening to increase NIM and support bank profitability.
But even beyond the immediate threat of a rejiggering of the BOJ’s Yield Curve Control, which now appears will push 10Y yield above the 0% target, another factor that is likely playing a key role is the ongoing decline in BOJ bond purchases, which both the bond and FX markets have so far been sternly ignoring.
So will buyers step in? Absent a statement from Kuroda, the answer is probably not because as Bloomberg’s Mark Cranfield writes “in theory, considering that 10-year yields are near zero, the downside is almost limitless.” He also adds that Monday’s jump for JGB yields suggests “investors see the Bank of Japan meeting next week as a live one, with the real possibility of an tradable decision.”
Meanwhile, for all those who had been lamenting the lack of volatility in the Treasury complex, well, you are in luck: vol is back with a vengeance, at least in Japan.
As for what happens to the Yen, keep an eye on 110.76, which is the support from the USDJPY trendline: a break here, and it’s back down to 106.
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