Bond Report: Treasury yields rise after Bank of Japan’s surprise shift sparks global bond selloff


Ten- and 30-year U.S. bond yields jumped for a third straight session on Tuesday after a policy shift by the Bank of Japan sparked a selloff in government debt, prompting analysts to speculate that the central bank may give up its role as last-remaining low-rate anchor.

What’s happening

The yield on the 2-year Treasury

climbed to 4.287% from 4.260% on Monday. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury

rose to 3.681% from 3.581% on Monday afternoon.

The yield on the 30-year Treasury

advanced to 3.736% from 3.622% late Monday.

What’s driving markets

The Bank of Japan surprised the market on Tuesday 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.

Read: Why the Bank of Japan’s surprise policy twist is rattling global markets

BOJ Gov. Haruhiko Kuroda, while keeping overnight interest rates at minus 0.1 percent, later said that the adjustment doesn’t amount 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 ultraloose strategy.

The yield on the 10-year Japanese government bond, or JGB
jumped 16.2 basis points to 0.418%, causing yields to rise across the market. German 10-year yields

rose 10 basis points to 2.305%.

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 to combat high inflation.

Markets are pricing in a 62% probability that the Fed will raise interest rates by 25 basis points to a range of 4.50% to 4.75% on Feb. 1, according to the CME FedWatch tool. The central bank is mostly expected to take its fed-funds rate target to at least between 4.75% and 5% by May, according to 30-day fed-funds futures.

In Tuesday’s U.S. economic releases, building permits for new homes fell 11.2% to 1.34 million in November, while housing starts dipped slightly by falling 0.5%.

What are analysts saying

“While other central bankers attempt to cool down super-hot inflation via spikes in interest rates, in Japan policy makers have been trying to fire it up, by prolonging the era of cheap money. A tiny tweak in the Bank of Japan’s ultraloose monetary strategy surprised investors, prompting a jump in the yen and a share selloff,” 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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