Fragility

For a short while, with reflation being traded in almost every corner of the global bond market, the Bank of Japan started to get “those” questions again. Almost of the humblebrag variety. A few years ago, Japan’s central bank had widened what is considered to be an acceptable trading range for its 2016 QQE addendum of Yield Curve Control (YCC). In 2018, Haruhiko Kuroda’s regime stated that it would “allow” 10-year JGB yields anywhere between -20 bps and +20 bps.

By late February 2021, optimism worldwide became such that the JGB 10s took off (sold off) in a trajectory that made it appear likely to test Kuroda’s power and commitment to YCC in its current iteration. Making it to 17 bps, yields then fell backward down toward 10 bps or so all over again.
 

To the media, and to Kuroda, this was a(nother) sign as to just how effective YCC must be in the hands of skilled monetary pioneers like those at BoJ; after all, they came up with QE twenty years ago and inaugurated this version of yield caps.

Hail to the experiment!

MISSION ALREADY ACCOMPLISHED?

Expectations of a strong post-pandemic recovery have pushed up global yields including those for Japan, where the 10-year yield has briefly crept near the BOJ’s implicit 0.2% ceiling…

Some analysts say the BOJ has already succeeded in breathing life back into a dormant market, thanks in part to a global bond rout that pushed the 10-year JGB yield to 0.175% last month.

Already, you can spot their problem; if it had been a “global bond rout” which was responsible for pushing up Japan’s government interest rates, could it have really been YCC that then kept them under “control?” Perhaps, but only if Japan’s experience turned out to be unique.

Of course, it wasn’t. As has been the case time and again, the market – not the central bank, any central bank – determines what and where bond yields trade. QE’s, QQE’s, and YCC’s are all just characters in an increasingly stale, uninteresting puppet show only the mainstream media (and the “analysts” it quotes) finds useful.

To begin with, notice what sticks out on the JGB chart: February 26.

While pundits had latched onto YCC for the JGB market’s sudden reversal anyone actually paying attention to that “global bond rout” has known perfectly well just how often February 24-25-26 has come up in almost every one of these markets including Japan’s.

Japanese YCC would have had absolutely nothing to do with, say, German bunds or UST TIPS real yields.

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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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