The Bank of Japan adjusts the yield curve control to shake the prospect of interest rates, and the market has increased its bets that the end of negative interest rates is approaching
Financial World 2023-08-10 00:56:03
The Bank of Japan’s move to loosen its grip on benchmark 10-year government bond yields is shaking the outlook for short-term borrowing costs, with swap market traders expecting the central bank to end its negative interest rate policy in as little as eight months.
This represents a profound change for investors in the Japanese market, which has been struggling under the shadow of negative interest rate policy since early 2016, when former Governor Haruhiko Kuroda made further improvements to the zero interest rate policy that had been implemented on and off since 1999. Overweight.
After years of being often caught off guard by the BOJ, investors are not listening to new Governor Kazuo Ueda and his policy committee. Market bets on the end of negative interest rates have been brought forward to March from July next year. Overnight index swaps suggest the short-term policy rate could rise above 0.1% by the end of September 2024.
While the central bank said the surprise move to give 10-year yields more room to rise to 1% was an attempt to make yield curve control more flexible, managing the process could force the central bank to engage in bond purchases that erode liquidity and distort markets. The inconsistency has undercut the central bank’s rhetoric in the eyes of some investors who see pressure on policymakers to raise rates as inflation in Japan begins to firm up.
The end of the negative interest rate policy could support the weak yen and reduce the financial burden on commercial banks. This will also complement the rise in Japanese long-term government bond yields, increasing the incentive for large Japanese institutional investors to sell assets such as U.S. Treasuries and return more funds.
“Market players are gradually shifting their focus to short rates as the grip on 10-year yields loosens,” said Eugene Leow, fixed income strategist at DBS Bank in Singapore. “Focus on short interest rates is a natural progression once yield curve control is removed, which could happen in 2024.”
Kazuo Ueda had previously said the July 28 adjustment was not the end of yield curve control, and Deputy Governor Shinichi Uchida said the bank was far from raising interest rates, which are now negative. However, Leow said the market was skeptical, clearly seeing policy moving in that direction.
The 10-year JGB yield climbed to 0.655% last week, the highest level since 2014, and the Bank of Japan was forced to intervene in the market with two unplanned bond purchases to curb the pace of rising yields. Interest rates on 30-year government bonds, typically held by Japanese life insurers, hit a near seven-month high of 1.63% last week.
Investors continued to hedge against further gains in 10-year yields, with 10-year overnight index swaps trading around 0.76%. That’s about 15 basis points above the benchmark 10-year yield, but still below the central bank’s new 1 percent cap on real yields.
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2023-08-09 16:56:03
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