Bonds around the world extended a retreat as the Bank of Japan, so far a holdout on ultra-loose monetary policy, surprised investors by loosening its grip on yields.
The move sent Japan’s 10-year yield to the highest level since 2014, triggered big swings in the yen and sparked a debate over whether the country is starting to normalize policy.
US and European bond markets tumbled on speculation that higher yields in Japan may lead investor to repatriate cash home. Japanese investors are the biggest foreign holders of US government debt and own sizable amounts of European and Australian bonds.
Treasury 10-year yields were flat at 4%, having risen 13 basis points the previous day. The equivalent rate in Germany increased 5 basis points, and Australia’s climbed as much as 20 basis points.
“This is a big week as it signals we are pretty much at the end of hiking cycles globally,” said Peter Kinsella, head of currency strategy at asset manager Union Bancaire Privee UBP SA.
The “BOJ is effectively saying the top of the yield range is now 1% so that implies 50 basis points in potential steepening. So it’s slow gradual normalization, but yes, it’s normalization BOJ style,” he added.
US shares took a knock towards close on Thursday when the Nikkei news agency reported the BOJ would discuss tweaks to yield-curve control at its meeting. The bank followed through at its Friday meeting, saying it would show more flexibility over its yield curve control policy.
Japan’s 10-year yields jumped as much as 13.5 basis points to 0.575% after the decision, above the BOJ’s earlier cap of 0.5%.
The yen strengthened as much as 1% against the dollar, but ceded some of its gains as the session wore on. The currency is still headed for its best month since March, with gains of almost 3.5%.
“The BOJ decision is an invitation to short dollar-yen,” said Kenneth Broux, currency strategist at Societe Generale SA. “Higher Japanese yields reduce the spread versus US Treasuries and German bunds.” He added however that dollar downside could be limited, given Thursday’s strong US data that could imply further Fed tightening.
In stock markets, the busiest week in the earnings calendar was drawing to a close. European stocks edged lower, but were still set for their third straight weekly gain.
Among individual movers, Hermes International rose 2% in Paris after reporting robust sales for its high-end handbags. Standard Chartered Plc jumped 5% after announcing a $1 billion stock buyback.
In the US, Intel Corp. shares rose 8% in pre-market trading after the chipmaker gave a bullish revenue forecast. Its report follows positive quarterly earnings from the likes of Meta Platforms Inc. and Microsoft Corp.
Earlier, Chinese stocks rose, with Hong Kong-listed tech names gaining as much as 2% after regulators were said to have signaled additional support for the technology sector. Investors also speculated authorities may lower stamp duties to bolster trading levels.
Tony Sycamore, a market analyst at IG Australia Pty:
“This will likely see the market test the 1% cap in sessions ahead (like a red rag to a bull) and is significant because it marks the end to the BOJ’s multi-decade experiment of ultra loose monetary policy. Once the BOJ steps foot out the door, they can control the pace of the exit but they can’t change direction.”
Khoon Goh, head of Asia research at Australia & New Zealand Banking Group:
“The BOJ’s decision to tweak their yield curve control was broadly in line with what the market had anticipated, but probably not as hawkish as previously feared. The range that the 10-year JGB yield is allowed to fluctuate remains unchanged, but greater flexibility has been introduced at the upper and lower bounds of the range. But how far yields will be allowed to trade beyond those limits is uncertain, and something which the market will no doubt try to test.”
Joey Chew, head of Asia FX research at HSBC:
“We doubt this will be the end of high USD-JPY volatility in the near term. The disappointing lack of revision to its inflation forecasts for FY2024 and FY2025 suggests that the BOJ is still not convinced that inflation can stay above 2%.”
Matthew Simpson, a senior market analyst at City Index:
“If the BOJ wanted to confuse the markets, it’s mission accomplished. It’s seems apparent that we’re an important step closer to the BOJ actually widening or even abandoning YCC. Once the dust has settled, the focus shifts to PCE inflation report. Jerome Powell emphasized the importance of incoming inflation data, and if core PCE softens as expected the we’ll likely be looking for USD/JPY to close below 137 for the week.
Key events this week:
Some of the main moves in markets:
This story was produced with the assistance of Bloomberg Automation.
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