In one of 2022’s more unusual U.S. bond-trading sessions, it wasn’t only the Federal Reserve or European Central Bank weighing on the roughly $24 trillion Treasury market on Monday, but also concerns about the Bank of Japan.
The BOJ, the last dovish major central bank left in the world, may be moving closer to a hawkish pivot, analysts said. Over the weekend, the Kyodo News agency reported that Japan’s Prime Minister Fumio Kishida is looking to make the country’s 2% inflation target more flexible. As soon as next spring, Kishida could discuss details of how to revise the government’s decade-long accord with the BOJ on the 2% target after a new central-bank governor succeeds Haruhiko Kuroda, whose term ends in April, according to Kyodo.
Traders on Monday disagreed over how much impact the BOJ developments might be having on Treasurys, though chatter about a coming policy shift seemed to add to an overall sense of global central banks heading higher for longer with interest rates. Treasurys sold off, led by activity in seven-year notes through 30-year bonds, which pushed their yields up by more than 10 basis points each. The benchmark 10-
and 30-year rates
jumped to 3.59% and 3.64%, respectively, as the bond market flipped back to concerns about higher interest rates, plus inflation and away from fears of a recession.
Taken together with China’s sudden reopening following a swift rollback of many COVID restrictions, the latest on the BOJ was having at least some influence on Treasurys trading, said Larry Milstein, senior managing director of government debt trading at R.W. Pressprich & Co. in New York.
“Treasurys were already getting hit before we came in and it certainly feels like Asia is having an impact,” Milstein said via phone. With the BOJ’s next policy decision coming on Tuesday, policy makers there could surprise by “taking a more hawkish tilt,” while China’s reopening and plans to spur its economy are likely to lead to demand for commodities, particularly metals, and possibly more inflation.
“We’ve already heard from the Fed, which is pushing back against what the market is pricing in,” while traders have absorbed European Central Bank President Christine Lagarde’s plans for more rate increases in 2023, the trader said.
The BOJ has kept rates below zero in 2022 despite a global-central bank tightening campaign, held on to a 2% inflation target, and used a yield-curve control policy to guide longer-term rates lower as part of its ultra-easy monetary stance. Samantha Azzarello and Gabrielle Jabre of JPMorgan Chase & Co.
see a chance that yield-curve control policy will be tweaked in March.
|Federal Reserve||Fed to hike 25bp at the Jan/Feb meeting and 25bp in March. Terminal rate 5.00%.|
|European Central Bank||ECB to hike 50bp in Feb and March, and 25bp in April. Terminal rate of 3.25%.|
|Bank of England||ECB to hike 50bp in Feb and March, and 25bp in April. Terminal rate of 3.25%.|
|Bank of Japan||BOJ expected to tweak YCC from 10y 0% to 0.25% at the March meeting. Risks skewed toward an earlier move.|
|Emerging-market central banks||EM CBs may start easing next year but most look set to keep rates high for longer. Expect easing cycles to get under way in Latin America (Brazil, Chile, Colombia and Peru) and India. The rest of EM Asia, having lagged its EM peers in lifting off, is expected to stay on hold next year.|
Source: JPMorgan Chase & Co.
Monday’s rise in U.S. yields was seen by some strategists as reflecting concerns that Japan could intensify its pull back from Treasury purchases, a process under way since August. A continued pullback would have the impact of pushing bond yields higher at a time when there’s a dearth of large regular buyers, some said.
To be sure, some traders and analysts attributed Monday’s moves to factors other than the BOJ, such as an extra supply of U.K. bonds and positioning around a 20-year auction on Wednesday. They said the BOJ seemed to be having either a peripheral impact or no effect on the market.
With central bankers turning more hawkish and the need for rates to go up for a while, there’s “concern about how much more they have to raise rates moving forward, a reflection that inflation is still with us,” said John Farawell, head of municipal trading at Roosevelt & Cross, a bond underwriter in New York.