Global government debt markets on Tuesday after the Bank of Japan surprised markets by unexpectedly adjusting its policy of pinning long-term bond yields at dropped ultra low levels.
The move sparked a sell-off in government debt, with the yield on Japan’s 10-year bonds surging by as much as 0.2 percentage points to 0.47 per cent, its highest level since 2015, before easing to 0.41 per cent.
Other sovereign debt yields climbed higher, pointing to a fall in price. The yield on 10-year US Treasures climbed to a three-week high of 3.7 per cent, while UK 10-year gilt yields rose by 0.1 percentage point to 3.6 per cent and Germany’s 10-year Bund yield rose by a similar level to 2.27. per cent.
Japan’s yen jumped 4.2 per cent to trade at ¥131.2 against the US dollar. The pound fell 0.1 per cent against the dollar to $1.21.
The BoJ widened the range in which it allows 10-year bond yields to trade, letting them fluctuate by plus or minus 0.5 percentage points from its target of zero, instead of the previous 0.25 percentage points. The country first enacted its “yield curve control” (YCC) policy in 2016 and the 0.25 percentage point band has been in place since 2021.
BoJ governor Haruhiko Kuroda denied the move marked a pivot away from Japan’s ultra-loose monetary policy, saying that adjusting the yield target “does not signal the end of YCC or an exit strategy.” The BoJ kept overnight interest rates at minus 0.1 per cent, setting it apart from other key central banks that this year have raised rates rapidly in an effort to tackle high inflation.
Tohru Sasaki, head of Japan market research at JPMorgan, said the BoJ’s move was borne out of concern about the effect that volatility in global markets was having on Japanese markets. “If a market malfunction is also an important reason for today’s move, a further move may follow because just a 25 [basis point] move cannot end or improve the malfunctioning,” he added.
Jim Reid, head of global fundamental credit strategy at Deutsche Bank, said: “It’s important not to underestimate the impact this could have, because tighter BoJ policy would remove one of the last global anchors that’s helped to keep borrowing costs at low levels more broadly .”
Equity markets largely shrugged off the BoJ move. The benchmark S&P 500 and tech-heavy Nasdaq recouped morning losses to trade flat by midday trading on Wall Street.
The Europe-wide Stoxx 600 index, meanwhile, closed down 0.4 per cent while London’s FTSE 100 pared back losses from earlier in the session to close up 0.1 per cent. In Asia, Japan’s Topix index dropped 1.5 per cent.
Fredrik Repton, portfolio manager at Neuberger Berman, said the central bank’s decision would “intensify speculation that a pivot or even abandonment of the YCC could occur in the new year”.