Global government debt markets fell on Tuesday after the Bank of Japan surprised the market by adjusting its policy to set long-term bond yields at ultra-low levels.
The move sparked a wave of sell-off in government debt, with Japanese 10-year yields rising as much as 0.19 percentage points to 0.44%, according to Bloomberg data, the highest level since. from 2015. Then it dropped to 0.40 percent.
Yields on other sovereign debt moved higher, reflecting a decline in prices. Yields on 10-year US Treasuries rose to a three-week high of 3.68%, while yields on UK 10-year government bonds rose 0.09 percentage points to 3.58. % and the yield on the German 10-year Bund rose 0.1 percentage points to 2.29 percent.
The Japanese yen rose 3.9% to 131.7 yen against the US dollar. The British pound rose 0.3 percent against the dollar to $1.22.
The BoJ extended the range of 10-year bond yields allowed for trading, allowing them to fluctuate plus or minus 0.5 percentage points from their zero target, instead of the previous 0.25 percentage point. The country first introduced a “yield curve control” (YCC) policy in 2016 and a margin of 0.25 percentage points has been in place since 2021.
BoJ Governor Haruhiko Kuroda denied the move marked a pivot from Japan’s extremely loose monetary policy, saying the yield target adjustment “doesn’t signal the end of the YCC or a strategic withdraw”. The BoJ kept the overnight interest rate at minus 0.1%, setting it apart from other key central banks that have raised rates rapidly this year in an attempt to tackle high inflation.
Tohru Sasaki, head of Japan market research at JPMorgan, said the BoJ’s move was driven by concerns about the impact of global market volatility on the Japanese market. “If a market glitch is also an important reason for today’s move, a follow-up move is possible as only 25 [basis point] Migration cannot end or improve the problem,” he added.
“It is important not to underestimate the impact this could have, because of the BoJ’s tighter policy,” said Jim Reid, head of global credit strategy at Deutsche Bank. will remove one of the final global anchors that help keep borrowing costs low across the board.”
Japanese stocks fell, with the Topix index down 1.5%, but the other major indexes barely affected the wild swings in the bond market.
Wall Street’s S&P 500 index recovered its morning losses to close the day 0.1% higher, while the tech-heavy Nasdaq Composite was flat.
Meanwhile, the Europe-wide Stoxx 600 index closed down 0.4% while London’s FTSE 100 gained 0.1%.
Fredrik Repton, portfolio manager at Neuberger Berman, said the central bank’s decision would “reinforce speculation that a pivot or even abandonment of the YCC could happen in the new year”.