Bank of America Don’t Expect BoJ Policy Tweaks To Meaningfully Impact Wider Global Bonds

Bank of America outline several reasons for limited global FI reaction to any BoJ tightening:

• The action is already well priced.
• Limited historical evidence of large spillovers.
• YCC currently not capping yields.
• Fed's easing bias.
• Light positioning.
• They go on to note that “the immediate impact of BoJ policy change on global rates is likely to be limited but one potential channel of future spillover will be Japanese bank long positioning in USTs. Higher JGB yields and a sell-off in USTs could lead banks to rebalance from USTs to JGBs. We see this as more of a risk for 2H24 than 2Q24 as the BoJ would need to see more data and may wait for clarity from the US election. Both fundamentals and our global yield framework show a scope for the 10yr JGB yield to rise toward 1% or above.”
• “We have seen a mixed reaction in the vol market to a potential BoJ policy shift. This may be driven less by conviction on that shift and more about expectations for a relatively slow process of policy tightening. The Japan rate vol grid may only slowly awaken.”