The Bank of Japan intervened in the government bond market the day after it relaxed its control over long-term interest rates to control a spike in yields that had reached new decade highs. The market was reminded not to move too quickly.
On Wednesday, the yield on 10-year Japanese government bonds increased by two basis points (bps) to 0.970%, a level last reached in May 2013. However, the rate quickly decreased as the BOJ launched an emergency bond-purchase program. At 06:05 GMT, it was 0.955%.
Claudio Irigoyen, global head of economics at BofA Global Research, said, “They’ve said okay, let’s let the market find a new equilibrium, but let’s remind the market that about the upper bound, we can intervene.”
The Japanese central bank changed the 1% ceiling on the 10-year yield from an onerous restriction to a reference point on Tuesday, marking another minor retreat from its ten-year commitment to ultra-easy stimuli.
In recognition of market forces that have continued to drive rates up in tandem with movements in the global economy and local inflationary pressures, it also eliminated a vow to defend the level with offers to purchase an unlimited quantity of bonds.
“The market is still apprehensive that policy normalization is approaching,” stated Keisuke Tsuruta, a fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. The BOJ’s intervention stopped the rise in the 10-year yield, while other sections of the curve kept rising.
Following the news, the five-year yield hit 0.485%, a level not seen since April 2011.
For the first time since July 2013, the 20-year JGB yield hit 1.745%, while the 30-year yield hit 1.91%, the highest since May 2013.
After the intervention, the two-year JGB had not traded yet, although earlier in the day, the yield increased slightly to 0.160% for the first time since July 2011.
Hold curve regulations are “simplified but effectively dead,” according to London-based James Malcolm, a currency strategist at UBS. “The positive spin is that less overt control should help market function recover.”
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