31 October 2023
Dear clients,
The Japanese yield cap has turned into a benchmark rate: the Bank of Japan has revised its cap on 10-year government bond yields of 1% in favour of an "upper bound" rather than a hard target.
It will continue to buy bonds, but whether it will prevent yields from rising above 1% and how persistently, time will tell. The move was predicted by the Nikkei newspaper and the markets, having bought the rumours, sold on the facts.
The yen fell to the 150 per dollar mark. Japanese government bond futures, which hit near 10-year lows in morning trading, rose after the announcement. The Nikkei index rebounded 0.5%.
For now, investors seem to believe that US interest rates and the dollar will remain in the driver's seat, leaving the yen languishing near its lowest effective rate in history.
In the longer term, higher rates in Japan could encourage investors in the world's largest lender to keep their money at home rather than buying large amounts of offshore assets. This could finally lead to an appreciation of the yen.
For now, the sense that some sort of anchor is being maintained has cheered up Treasury trading a bit, sparking a brief rally.
The bond market's attention now turns to the US, where the Federal Reserve will meet and the Treasury will outline its plans to sell bonds.
On Monday, the US Treasury Department said it expects to borrow $776bn in the fourth quarter, $76bn less than estimated in July. Detailed refinancing plans are due on Wednesday, as is the Fed's policy decision.
In Asia, an unexpected slowdown in Chinese manufacturing activity dampened hopes that the Chinese economy had bottomed out and a recovery, albeit fragile, had begun.
The Shanghai Composite index fell 0.37% and Hong Kong's Hang Seng index slid 1.85% after the data was released.
Analysts said it was too early to call it a day and noted that they believe economic conditions will remain poor or even worsen further in the coming months.
In Europe, GDP and inflation data will be released later on Tuesday.
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