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BofA Looking For Gradual Bear Steepening & Higher Yields Later In Year

JGBS

Late on Thursday Bank of America noted that they revised their “JGB yield forecasts in response to our U.S. team's higher U.S. yield outlook and the three factors we discuss below. Our Japan economists expect a BoJ policy adjustment in October 2022 involving 1) an end to NIRP and 2) a hike in the YCC band, which would exert significant upward pressure on JGB yields in Oct-Dec.”

  • “We raise our end-2022 JGB yield estimates from 40bp to 49bp for the 10-Year yield and from 120bp to 130bp for the 30-Year yield. Our simulation indicates that a rising 10-Year U.S. Treasury yield should drive up the 10-Year JGB yield, resulting in a fair value above 50bp. However, we expect the BoJ's YCC policy to act as a cap. The BoJ's aggressive JGB purchases have also reduced market liquidity, and we expect yields to remain in a narrow range until it signals a hawkish pivot.”
  • “We estimated fair value, focusing on the 30-Year yield, based on 1) lifers' investment plans, 2) the Nelson-Siegel model, and 3) the forward rate. The BoJ's purchases have capped JGB yields amid upward pressure from rising commodity prices and the weaker yen, and we expect an uneventful June MPM (though there is considerable uncertainty) given the 10 May comments by Shinichi Uchida, executive director of the BoJ, that an increase in the upper bound for YCC would be a de facto rate hike. However, we expect the BoJ to signal a hawkish pivot at its July MPM and think the JGB curve could gradually bear-steepen between the July and October meetings.”
  • “The BoJ's yield-curve control (YCC) policy has kept yields for 10-Year and shorter maturities relatively low, but it has offered relatively little support for superlong issues. This suggests a fair value of around 105bp for the 30-Year JGB yield until the July MPM.”
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Late on Thursday Bank of America noted that they revised their “JGB yield forecasts in response to our U.S. team's higher U.S. yield outlook and the three factors we discuss below. Our Japan economists expect a BoJ policy adjustment in October 2022 involving 1) an end to NIRP and 2) a hike in the YCC band, which would exert significant upward pressure on JGB yields in Oct-Dec.”

  • “We raise our end-2022 JGB yield estimates from 40bp to 49bp for the 10-Year yield and from 120bp to 130bp for the 30-Year yield. Our simulation indicates that a rising 10-Year U.S. Treasury yield should drive up the 10-Year JGB yield, resulting in a fair value above 50bp. However, we expect the BoJ's YCC policy to act as a cap. The BoJ's aggressive JGB purchases have also reduced market liquidity, and we expect yields to remain in a narrow range until it signals a hawkish pivot.”
  • “We estimated fair value, focusing on the 30-Year yield, based on 1) lifers' investment plans, 2) the Nelson-Siegel model, and 3) the forward rate. The BoJ's purchases have capped JGB yields amid upward pressure from rising commodity prices and the weaker yen, and we expect an uneventful June MPM (though there is considerable uncertainty) given the 10 May comments by Shinichi Uchida, executive director of the BoJ, that an increase in the upper bound for YCC would be a de facto rate hike. However, we expect the BoJ to signal a hawkish pivot at its July MPM and think the JGB curve could gradually bear-steepen between the July and October meetings.”
  • “The BoJ's yield-curve control (YCC) policy has kept yields for 10-Year and shorter maturities relatively low, but it has offered relatively little support for superlong issues. This suggests a fair value of around 105bp for the 30-Year JGB yield until the July MPM.”