With the Trump reflation trade once again spooking global government bonds and sending rates higher around the world, overnight Japan’s 40-year JGB rose to 1% for the first time in 11 months as Treasuries led a global debt sell-off amid rising inflation fears. Quoted by Bloomberg overnight, Barclays’ rates strategist Naoya Oshikubo said that “the 40-year yield has further to go, but the speed of its rise has been very fast” and suggested that “the BOJ might take action if the yield rises further rapidly.”
On Wednesday, before the latest move, there was some speculation that the BOJ might increase the amount of bonds it buys for super-long zones as yields climbed, but the BOJ bought just the regular amount, which suggested to traders that the BOJ is willing to tolerate the rise, putting pressure on the USDJPY.
Heading into today’s session, the BOJ was expected to announce its last regular market operation for this month. According to Katsutoshi Inadome, a senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities, while the BOJ was expected to offer to buy 420bn yen in 1-to-3 year category, 400bn yen in 3-to-5 year category, and 410bn yen in 5-to-10 year zone, he cautioned that if the BOJ does not expand its purchases on the long end, it would disappoint the market, leading to a jump in the yen and bond selling: “If BOJ does what would be in line with the schedule as above, it is likely to spark bond selling on disappointment.”
He added that “super-long yields have risen to levels the markets saw as the upper end of the range for the BOJ’s yield curve control so if there is no action to stem these rises, it would raise doubts about its stance.”
Moments ago, the BOJ decided to avoid any “doubts about its stance” and when it announced the quantities for today’s POMO operations, it did not disappoint because whereas it previously bought “only” 410bn yen in the 5-10 year zone, today it increased the amount by 10%, to 450bn, effectively increasing the amount of debt the central bank is monetizing on the long end of the belly.
And with the telegraphed explicit support by the BOJ, any further selling in bonds has for now been halted, while the USDJPY spiked, as expected, tagging 115, before modestly dipping now that instead of concerns about tapering its QQE “with yield control” the BOJ has shown it is quite happy to keep the curve under control and from overshooting, despite Japanese December CPI printing stronger than expected across the board earlier in the session.
That said, even today’s “intervention” did not appease everyone, and as SMBC Nikko Securities in Tokyo wrote, the BOJ operation rose uncertainty about the BOJ’s February plan as the central bank’s operations this week suggest it is seeking to flatten the 2s10s curve which had been steepening. SMBC’s Souichi Takeyama added that “it raises uncertainty to what the buying plan will be for February” noting that “raising the amount of longer- dated bonds it buys at this time will strengthen expectations for further changes, such as making 450 billion yen the amount for the 5-to-10 year zone.”
One can sympathize: what until recently was supposed to be an intervention to gradually steepen the JGB yield curve has now become an attempt to flatten it. Our condolences to Kuroda, who lately no matter what he does, he always gets the undesired outcome.
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