Bond Reversal In Japan, But Pay Attention To It In Germany

Yield curve control, remember that one? For a little while earlier this year, the modestly reflationary selloff in bonds around the world was prematurely oversold as some historically significant beginning to a massive, conclusive regime change. Inflation had finally been achieved across multiple geographies, it was widely repeated, and this would create problems, purportedly, as these various places would have to grapple with higher interest rates.

The idea behind YCC is simple enough: according to conventional theory, rising interest costs are a hindrance to recoveries and economic growth, choking off inflation before it gets to become beneficial enough. According to the theory.

Therefore, a central bank that declares and then buys bonds as rates are going up can, using this model, limit just how much rates go up, ensuring the increase in them won’t spoil the good times before they get really going.

Of all places, it had been Japan which seemed – in media imagination welded tight to this conventional view – first to trigger actual YCC purchasing (by the Bank of Japan). While initially the Japanese YCC policy which was put in place all the way back in September 2016 “targeted” a yield of zero for the 10-year JGB, the specific dimensions of the policy allowed for some bit of leeway; +/- about 10 bps originally.

This band was widened to where it is now: +/- 20 bps from zero.

In 2021’s earlier reflation molehill, the JGB 10s got up as a high as 16.8 bps in yield (according to BoJ calculations of the constant maturity rate). Coming so close to that +20 bps range, this, of course, triggered all manner of chattering expectations for looming YCC usage given the inflationary hysteria globally.

That was up to February 26. Since then, JGB yields have retreated well away from 20 bps and are today only a couple bips above zero again with rates more seriously dropping over the past week. YCC success?

No. The idea is hardly mentioned, nor is it ever said why things must’ve changed and did so when they did.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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