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Categorized | Capital Markets

BoJ unleashes unlimited bond-buying plan: analysts react

Posted on November 17, 2016

Turning on the taps.

The Bank of Japan surprised markets this morning by announcing it would be dipping its toes into the bond markets by snapping up an unlimited amount of five-year and two-year bonds at fixed rates in the wake of a punishing global bond sell-off.

The announcement is the first follow-up from Japan’s policymakers after a landmark decision to adopt a yield curve target, where the central bank is aiming to cap the 10-year bond yield at around 0 per cent.

Ahead of today’s announcement, analysts had warned the BoJ’s approach was set to come under spotlight as a worldwide sell-off in government bonds has seen the 10-year bond yield inch slowly into positive territory for the first time since February this week. It is currently at 0.004 per cent.

“Up until this morning the BoJ had not felt the need to take any actions over and above its normal JGB purchase programme”, says Simon Derrick at BNY Mellon, who explains:

That changed today with the BoJ offering to buy unlimited amounts of 5-year JGB notes at – 4 bp and 2-year paper at -9bp. The offer attracted no bids as the yields were above the levels trading in the market at the time (2-year paper peaked out today at -10.2 bp while 5-year paper reached -4.7 bp).

Earlier today, BoJ governor Haruhiko Kuroda told parliamentarians the central bank did not have to accept rising Japanese bond yields pushed up by a climb in US treasuries.

Jim Reid at Deutsche Bank said the move was “the first sign that [the BoJ] are prepared to intervene” as part of the new yield targeting QE framework:

If the BoJ is serious about defending their targets in the face of rising global yields then we effectively have cross border helicopter money but with the helicopters dropping money printed in Japan over the US given Trump’s fiscal agenda.

The announcement seems to be driving a rally in sovereign bonds this morning, with yields slipping across Europe this morning (yields fall when a bond’s price rises).

“The credibility of the BoJ’s commitment to control the yield curve was sufficient to prompt a subsequent adjustment in the JGB market” said Mantas Vanagas at Daiwa Capital Markets.

“Yields fell across the curve, albeit only partially reversing the upward trend over recent days” he said.

Chart courtesy of Bloomberg