Treasury yields rise after Bank of Japan shift sparks JGB sell-off

Bond yields rose after a policy shift by the Bank of Japan sparked a sell-off in sovereign debt.

What’s happening
  • The yield on the 2-year Treasury
    climbed 3.3 basis points to 4.279%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    rose 8.3 basis points to 3.670%.

  • The yield on the 30-year Treasury
    added 8.4 basis points to 3.718%.

What’s driving markets

The Bank of Japan on Tuesday surprised the market by saying it was relaxing its bond yield curve control and would now allow the 10-year government debt yield
to fluctuate by plus or minus 0.50% from plus or minus 0.25% previously.

BoJ governor Haruhiko Kuroda, while also keeping overnight interest rates at minus 0.1 per cent, later denied that the adjustment amounted to a tightening of monetary policy, but observers saw the move as at least a step on the path away from the central bank’s ultra-loose strategy.

The 10-year Japanese Government Bond, or JGB, yield jumped 16.2 basis points to 0.418%, causing yields to rise across the market. German 10-year yields
rose 6.2 basis points to 2.267% despite a report showing factory gate prices in Europe’s biggest economy fell 3.9% in November. Analysts had forecast a 2.5% decline.

The BoJ move comes as other major central banks, such as the Federal Reserve and European Central Bank, have already started sharply tightening monetary policy in order to combat high inflation.

Markets are pricing in a 65% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.50% to 4.75% after its meeting on February 1st, according to the CME FedWatch tool. The central bank is expected to take its Fed funds rate target to 4.9% by May 2023, according to 30-day Fed Funds futures.

U.S. economic updates set for release on Tuesday include November building permits and housing starts, due at 8:30 a.m. Eastern.

What are analysts saying

“While other central bankers attempt to cool down super-hot inflation via spikes in interest rates, in Japan policymakers have been trying to fire it up, by prolonging the era of cheap money. A tiny tweak in the Bank of Japan’s ultra-loose monetary strategy surprised investors, prompting a jump in the yen and a share sell-off,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

“The central bank has been trying to hold down borrowing costs by buying or being poised to purchase unlimited amounts of government debt. The shift in policy was slight…but even so it triggered sharp market movements. The decision is being read as a sign of testing the water, for a potential withdrawal of the stimulus which has been pumped into the economy to try and prod demand and wake up prices. But the Bank is still staying firmly plugged into its bond purchase programme, claiming this is just fine tuning, not the start of a reversal of policy,” Streeter added.

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