Treasuries Fluctuate as Japanese Bonds Decline on BOJ Decision

Updated on
  • Japanese 10-year yield increases most since May 2013
  • U.S. debt erases losses following weak GDP statistics

Policy Decision: Did the BOJ Do Enough?

Treasuries fluctuated as tumbling Japanese government bonds dragged global sovereign securities lower after a Bank of Japan policy announcement that disappointed investors looking for a bigger stimulus.

Japanese benchmark 10-year bonds sank the most in three years as the BOJ expanded its purchases of exchange-traded equity funds, while refraining from making a deeper cut to its negative interest rate or increasing the amount of government debt it buys to boost growth and reduce the risk of deflation. Treasuries erased losses as a report showed the U.S. economy expanded less than projected last quarter.

“The BOJ’s policy decision is the key factor driving bond markets today,” said Richard Kelly, head of global strategy at Toronto Dominion Bank in London. “And if you actually dig around the global data in the last month or two, they mostly surprised on the upside. There just wasn’t the impetus right now. Positioning in Treasuries and global rates had to unwind.”

Benchmark Treasury 10-year note yields fell about one basis point, or 0.01 percentage point, to 1.5 percent as of 8:55 a.m. in New York, Bloomberg Bond Trader data show. The yield has risen about three basis points since the end of June.

Tightening Bias

With the Federal Reserve still on a tightening bias while central banks in other major economies remain dovish, Treasury 10-year yields will be confined to a range of 1.4 percent to 1.6 percent, TD’s Kelly said.

The yield on Japan’s 10-year bond jumped eight basis points to minus 0.195 percent, the biggest increase on a closing basis since 2013. Germany’s 10-year yield also erased losses on the U.S. data, after earlier rising as much as four basis points. It yielded minus 0.09 percent.

The BOJ has become more important to some U.S. traders than the Fed because the policies that have driven Japan’s yields below zero are also spurring a rush for U.S. debt. Japan’s purchases of overseas bonds surged to a record this month, helping push benchmark US. 10-year yields to an all-time low of 1.318 percent July 6.

Bond Returns

Treasuries have since pared gains, leaving them with a 0.1 percent return this month through Thursday, based on the Bloomberg World Bond Indexes. Japan’s bonds lost 0.4 percent in the period. The Fed said this week near-term risks have diminished, suggesting policy makers may raise interest rates this year or next.

“I’m cautious on Treasuries and other bond-market yields,” said Park Sungjin, the head of principal investment in Seoul at Mirae Asset Securities Co., which oversees $8 billion. “The U.S. economy is not bad. The Fed will do something this year.” Benchmark U.S. yields will rise to 1.90 percent by Dec. 31, he said.

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