Global Bond Markets Creak as Japan Loosens Yield-Curve Control

A shift in the last global anchor of low yields has sent a shiver down the spines of bond bulls worldwide.

(Bloomberg) — A shift in the last global anchor of low yields has sent a shiver down the spines of bond bulls worldwide.

The Bank of Japan took another small step on the way to policy normalization Friday, giving local benchmark yields more room to rise. That bolsters the argument that a wave of Japanese cash invested in everything from Treasuries to European bonds to Brazilian debt may soon flow out of global markets toward home.

Bond markets around the world have been under selling pressure in recent months as the US economy has remained resilient despite a string of Federal Reserve interest-rate hikes and as inflation in Europe has remained elevated. An index of global government debt has dropped for five of the past seven days and is now some 3% down from this year’s high set in February.

Japan’s 10-year yield has hit the highest since 2014, “and all other things being equal, this should continue to creep up in the days and weeks to come and removes an anchor for global yields,” said Jim Reid, a strategist at Deutsche Bank AG in London.

On Friday, Japan’s 10-year yields jumped as much as 13.5 basis points to 0.575% after the decision, above the BOJ’s earlier cap of 0.5%. Similar-maturity US Treasury yields climbed to within a whisker of an eight-month high, while those in Australia and Europe also rose.

The BOJ maintained its target for 10-year yields at around 0% but said the 0.5% ceiling was a reference point, not a definite limit as it aimed to make its easing program more flexible. The yen whipsawed, falling more than 1% before reversing course and rallying to trade about the same amount higher — and then paring those gains.

The central bank’s move “will be interpreted by Treasury investors as a selling pressure because Japan’s government bond yields will likely move higher,” said Gordon Tsui, managing director and head of fixed income of Ping An of China Asset Management (Hong Kong). “Yen-based investors will become cautious on unhedged foreign currency exposure and need to manage down such mismatch. This will exert strengthening pressure on the yen.”  

That would be bad news for bond bulls who are betting the Fed is near the end of its policy tightening and will soon have to cut interest rates to avoid a US recession. Jupiter Asset Management says 10-year Treasury yields may fall 150 basis points by the end of next year, while DoubleLine Capital LP’s Jeffrey Sherman argues that the Fed may slash rates by one percentage point. 

Not everyone is convinced that the BOJ’s policy tweak will hurt global bonds that badly. For Shinji Kunibe, a lead portfolio manager at the global fixed-income group of Sumitomo Mitsui DS Asset Management, Friday’s change was “merely a technical one.”

“It has eliminated uncertainty over the BOJ’s policy outlook, so we can look at foreign bonds with a bias of buying,” he said. “The tweak is totally different from a rate hike and leaves Japan isolated” from the rest of the world where authorities are tightening policy.

The Fed this week raised the target range for its benchmark federal funds rate by 25 basis points to the highest level since 2001. That was an 11th increase since March 2022.

“The yield-curve-control tweak opens room for the 10-year JGB yield to go higher, which may discourage some Japanese investors from investing in government bonds in some of the other developing markets,” said Frances Cheung, a strategist at Oversea-Chinese Banking Corp. in Singapore. Still, that will depend on how quickly Japanese yields climb and how appealing the potential returns are to investors, she said.

(Updates throughout. A previous version corrected a global government bond index move.)

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