(USTs lower, steeper on SOLID VOLUMES) while WE slept; BoJs YCC surprise, expands target band to 50bps from 25bps; discount window usage on rise?
Good morning … 10yy are UP overnight on heels of the BoJ SURPRISE (statement) and I’ve taken the liberty to move the goalposts a bit and turn focus TO levels of support we’re now approaching…
TLINE in place for about a year, bullish broken for a couple weeks, would suggest we watch 10yy at / around 3.75% (3.73%or so, really) while the 50dMA rests just above @ 3.83%. Momentum (slow stochastics) remains a bearish DAILY input and this, in my view, will continue to be 'the gift that keeps on giving’ as all sorts of correlations and USD related investments and TRADES are unwound (or put on — is THE JGB Widowmaker to make a comeback?) … And for more on WHY,
ECONOMY
BOJ shocks markets with surprise widening of yield target band
Central bank to allow yields on 10-year JGBs to move within 50bps of 0% goal… In a policy statement on Tuesday, the central bank will allow yields on 10-year government bonds to move up or down within 50 basis points around its 0% target, wider than the previous 25-point band.
"This is neither a tightening nor a step toward an exit. This is a tweak to the monetary policy operation," BOJ Gov. Haruhiko Kuroda told reporters in Tokyo…
The BoJs XMAS SURPRISE was / IS a big deal, in my view. Having led us IN TO the world of QE and even gotten smart (ie BRAINard) US officials to bring up potential of deploying the Jedi mind trick of YCC here in the USofA, the UNwinding, albeit slowly, of YCC will impact global markets for more than that overnight period … In MY VIEW it will lead risk markets lower (perhaps accelerating the process of finding THE bottom (?)) and the curve steeper (less flat)
Bloomberg (via Yahoo) detailing BoJs XMAS surprise
BOJ Blindsides Traders to Echo Christmas Day Shock of 1989
… BOJ Governor Haruhiko Kuroda’s decision to widen the trading band on 10-year bond yields triggered a jump in the yen and roiled global markets. The change blindsided investors, just like Kuroda’s move to boost bond purchases in 2014 and Japan’s festive season rate hike in 1989.
“It was about this time, 33 years ago when, unhappy with dollar-yen, the BOJ hiked 25 basis points to 4.5% on Christmas Day,” Martin Whetton, head of fixed income and currency strategy at Commonwealth Bank of Australia, wrote in a note…
For MORE, ZH
BoJ Sparks Market Chaos With Huge 'Yield Curve Control' Adjustment
… And sure enough, 10Y JGB yields have instantly exploded higher to their highest since 2015...
JGB Futures trading has been halted on the Osaka Exchange…
… This action by The BoJ has sparked chaos in other markets with US Treasury yields spiking...
… here is a snapshot OF USTs as of 711a:
… HERE is what same shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries are lower and the curve steeper this morning after the BOJ surprised markets by widening the YCC band, sending JGB 10y yields more than 15bp higher overnight WSJ DXY is sharply lower (-0.75%) while front WTI futures are higher (+1.35%). Asian stocks were all in the red after the BOJ move (Nikkei -2.46%), EU and UK share markets are mostly and modestly lower while ES futures are little changed as of 6:55am in NY. Our overnight US rates flows saw 'opportunistic' buying from central banks and asset managers (in the long-end). Against that, fast$ names added steepeners. The desk also noted that banks have been increasingly active in belly off-the-run paper- perhaps linked to the recent retracements lower in swap spreads. Overnight Treasury volume was solid at ~165% of average overall with 10's (244%) predictably seeing the most elevated average turnover among benchmarks this morning.… Our first attachment today offers a quick look at the 10yr JGB yield in a daily chart format. Quite the 'Christmas surprise' from the looks of it. We're happy that our Yen-based rates strategist Fujiki-san may finally get to see some movement in Japan's 10yr benchmark worth writing about...
… and for some MORE of the news you can use » IGMs Press Picks for today (20 DEC) to help weed thru the noise (some of which can be found over here at Finviz).
Given the significance of the move by the BoJ overnight, here are a couple / few first reactions from Global Wall Street.
ABNAmro: Japan - Kuroda's Christmas surprise
BoJ suprises with early shift of YCC framework. … feeding a further comeback of the yen
This morning, the Bank of Japan surprised friend and foe by shifting its Yield Curve Control (YCC) framework much earlier than expected. While leaving its policy balance rate and 10-yr yield target unchanged for now (at -0.1% and 0.0%, respectively), the BoJ announced to widen the trading band on 10-year bond yields and raise the upper limit of the band to around 0.50%, from 0.25%. Consensus expectations including ours was for the Bank of Japan to keep its monetary policy broadly unchanged the coming months, following repeatedly dovish comments from Chairman Kuroda whose second and final term expires in April 2023. Remarkably, many BoJ watchers did not expect any monetary policy change at all for the foreseeable future. We anticipated the first twist in the BoJ’s monetary policy to come in Q2-2023, just after Kuroda’s departure, including a modest increase in the policy balance rate and the BoJ allowing a gradual move of the 10yr yield band towards 0.50%. The fact that the BoJ has once more surprised financial markets is not new: earlier unexpected moves have contributed to its reputation that the Japanese central bank intends to surprise markets from time to time rather than being a textbook example of delivering forward guidance. At the time of writing, the Japanese 10-year bond yield jumped by 15 bp to around 0.40%.… feeding a further comeback of the yen
The BoJ’s surprise move triggered the yen to rally by more than 3% versus the US dollar and the euro. Indeed USD/JPY dropped from 137.30 to 132.54 and EUR/JPY from 145.63 to 140.63. The uptrend of the US dollar versus the yen has now also come to an end, with the breaking of the 200-day moving average in USD/JPY. We expect more upside in the yen versus the US dollar, mainly because of the rate cuts by the Fed we foresee to start end of 2023. Our end-of-year forecasts for USD/JPY currently stand at 132 for 2023 and 125 for 2024.
DBs Early Morning Reid (written today by NOT Jim)
… We go to press this morning amidst big moves in global markets overnight, since the Bank of Japan have decided to adjust their yield-curve-control policy, which is widely seen as the beginning of a potential end to their ultra-loose monetary policy. That policy has made them a big outlier compared to other central banks this year, having maintained rates at the zero lower bound whilst others embarked on their biggest tightening cycle in a generation. Indeed, it’s important not to underestimate the impact this could have, because tighter BoJ policy would remove one of the last global anchors that’s helped to keep borrowing costs at low levels more broadly.
In terms of the policy shift, the BoJ announced in a surprise move that Japan’s 10yr yield would now be able to rise to around 0.5%, having been limited to 0.25% previously. In turn, that led to a massive slump in Japanese equities, with the Nikkei down by -2.88% this morning, and those moves lower have been echoed more broadly. Indeed, not only are other indices in Asia pointing lower, including the CSI 300 (-1.64%), the Shanghai Comp (-1.03%), the Hang Seng (-2.19%) and the Kospi (-1.10%), but futures on the S&P 500 are currently down -1.07%, even after a run of 4 consecutive declines for the index already. The one big exception to this pattern of equity losses were bank stocks, with those in the Nikkei surging +4.96% this morning given the potential move away from ultra-low borrowing costs.
Unsurprisingly, Japanese government bond yields have surged on the back of the announcement, with the 10yr yield up +15.5bps this morning to 0.41% after trading around 0.25% for months. But the impact hasn’t been confined there either, with Australian 10yr yields up +19.5bps this morning, and those on US 10yr Treasuries up +8.1bps to 3.666%. In the meantime, the yen has strengthened massively, gaining +2.75% against the US Dollar this morning to 133.22 per dollar.
UBSs Paul Donovan,
The Bank of Japan did something!!!!!
The Bank of Japan has done something (words I have not written for years). Today’s Bank of Japan meeting increased the upper limit for its 10-year government bond target from 0.25% to 0.5%. Bank of Japan Governor Kuroda said it is not a rate hike, but a rate the Bank of Japan targets is higher today than it was yesterday.The impact on the Japanese economy is likely to be slight. The yen strengthened, but the move was less abrupt than in November, and takes the yen to June/July levels. While Japanese inflation is subdued, it is something that an older population worries about—this may be a gesture to that demographic.
German November producer prices fell more than expected, with a 3.9% m/m decline. Global inflation might decline faster than expected—wage-cost led inflation is sticky, whereas profit margin-led inflation can change quickly.
There is US housing starts data, following from yesterday’s NAHB house price decline. The US still has a shortage of houses, but higher borrowing costs have deterred new buyers. Higher rents are pushing Gen Z back into their parents’ basements (where, per the recent Chief Economist’s Comment, there is a risk that they give up on home ownership and start speculating in crypto).
CSFB on the technicals of the move,
Market Spotlight: USDJPY weakness - more to go yet
After being bullish from October 2021, USDJPY hit our core upside target at 147.62/153.01 in October where we then neutralized our long-held position and called for a top (see our spotlight – USDJPY at target and we look for a top, 14th October).
The initial sell-off took the market pretty quickly to our target of the 200-day average and 38.2% retracement of the 2021/2022 bull trend (at 133.09) but as we have consistently argued we have viewed this as a temporary pause ahead of a fresh leg lower and the tweak (not exit) by the BOJ to the YCC framework overnight has acted as the catalyst for a fresh leg lower overnight and removal of 133.09.
We maintain our tactical negative outlook with our core objective at 127.47/27 which is the 50% retracement of the 2021/2022 bull trend but more importantly the “neckline” to the 2003/2020 multi-year base and where our “ideal” scenario is to then look for important floor.
For somewhat more,
AllStarCharts: Holy Yen. Wow!
All hell seems to be breaking loose at the BOJ.
I’m not going to pretend to know, or care. But I can tell you that Yen traders like it.
And investors in precious metals sure as hell love it.
These are good things to wake up to if you’re long gold and silver:
Japanese Yen is absolutely ripping.
This, among other things, is putting further downside pressure on the US Dollar, which has had such a strong negative correlation with so many risk assets, including stocks and crypto currencies.
While the Yen was getting destroyed, stocks, crypto and precious metals were struggling earlier this year.
And then a funny thing happened in late September: British Pounds bottomed. Then Euro botted 2 days later…
Finally for couple things NOT (directly) BoJ related, another 60/40 visual and thought from Bloomberg
… It seems like the only thing moving higher in markets right now is yields, even when adjusting for expected inflation. Real yields — derived from Treasury Inflation Protected Securities — have bounced off 1%, back toward the 13-year high touched in October, helping to drive fresh declines for the classic 60:40 portfolio.
That highlights the concern that investors pursuing the strategy are failing to account for changes to the makeup of markets, which undermines the portfolio’s aim of achieving diversification. The strong role now played by tech stocks, which are seen as a long-duration play and are therefore highly vulnerable to moves up in real yields, may mean that bonds and broad stock gauges are going to remain too closely tied together. Either way, given the Federal Reserve’s determination to rein in inflation, it’s hard to see real yields moving lower for some time to come, which will continue weighing on assets.
With BONDS and 60/40 in mind, one last zinger from ZH,
Spike In Fed Discount Window Usage Hints At Looming Bank Crisis
… The problem is that if one fast forwards to today, the discount window is again being used aggressively, and in the last week was just over $6.2 billion, after peaking at $9.5 billion, two weeks ago, the most since June 2020.
The spike in Discount Window usage has even stumped JPMorgan whose rates strategist Teresa Ho wrote last Friday (her full must-read thoughts available to pro subs) echoed our thoughts above on the "Ample reserve" framework, noting that "there are still over $3tn of reserves and over $2tn of cash at the Fed’s ON RRP, so in no way does this suggest there are systemic liquidity concerns. Indeed, that wholesale funding rates have remained well-behaved even heading into the final weeks of the year suggests as such", and yet "it is surprising that in spite of the available amount liquidity in the system, usage at the discount window still increased. Borrowing at the discount window is often seen as a last resort for banks in terms of sourcing funding, and hence there is an implicit stigma associated with it. Whether that stigma is justified or not is an open question."
Some more details from JPM…
… THAT is all for now. Off to the day job…