The Fed and the ECB did what was expected this past week (quarter-point rate hikes for each), but the Bank of Japan made perhaps the biggest policy adjustment and one that caught the markets a bit off-guard. Technically, the BoJ’s target yield on 10-year bonds is still 0% and the range on the 10-year yield is still +/-0.50%. What changed is that 0.50% is now a reference point, not a cap, and the central bank will buy bonds up to 1%. This effectively accomplishes two things - 1) the BoJ is starting to pull itself out of the bond buying business, which essentially begins the process of tightening monetary conditions and 2) it allows the free market to begin pricing Japanese bonds more appropriately.
The market reaction wasn’t quite what I expected. The 10-year JGB yield quickly shot past the 0.50% level, but only topped out at around 57 basis points. Then yen didn’t move much at all since a lot of the gains happened in the lead-up and the BoJ technically didn’t move the hard cap up to 1%. Stocks, however, rallied. I really thought the volatility spike would scare the bulls off when one of the last central bank holdouts finally started capitulating, but I guess the overenthuastic bulls willing to buy on any news are still in control for now. Maybe the BoJ news was telegraphed too early or maybe the markets were happy that this was only a soft start to tightening by the BoJ. Either way, the reaction wasn’t what I expected.]
Keep reading with a 7-day free trial
Subscribe to The Lead-Lag Report to keep reading this post and get 7 days of free access to the full post archives.