Breakout postponed
BoJ news is not really news, yet
Last week the Bank of Japan apparently ‘shocked’ and ‘surprised’ markets with ‘unexpected’ (leaked) news that it would discuss yield curve control at last Friday’s meeting. The BoJ duly discussed yield curve control at the meeting and made some adjustments to the trading band of 10-year government bond yields. This allowed 10-year yields to rise ‘to a 9 year high’. Perhaps a little critical thinking is in order. Last week’s story is new only for 10-year JGBs and has already encouraged a lot of receiving in the swaps market. The Japanese rate market has not been as rigid as news reports suggest, because 10-year JGB yields are the exception, not the rule. Despite last week’s news, a lot of traders seem yet to be convinced the BoJ signalled a yield break-out.
Inflation is high in Japan (relatively and even absolutely). Every other major central bank has already tightened monetary policy and perhaps the BoJ will eventually raise rates. But the 10-year JGBs are perhaps not the most sensitive measure of Japanese interest rate risk. The 10-year swap rate is much more market-driven than 10-year JGBs and already spiked much higher than current levels earlier this year when the Japanese currency plunged.
Plus, according to the BoJ, in May 2023 turnover in on-the-run Japanese Government Bonds (JGBs) remained close to a 10 year low. Maybe it rose in the subsequent two months, though probably not by much. And foreigners dominate what JGB turnover there is. When Western newswires breathlessly report the moves in JGBs, they are preaching to the converted.
Finally, higher JPY rates invariably brings more end-client receiving in Yen swaps in every tenor reported by DTCC - denoted by larger negative numbers in the chart below.
From which we conclude the recent news is not as groundbreaking as some suggest, and a lot of traders are not yet to be convinced there is any kind of policy break-out about to happen.