BoJ Stirs Memories Of 1989

JGBs experienced a state of freefall after the BoJ deployed a surprise widening of its permitted 10-Year trading band (to -/+0.50% vs. the previous -/+0.25%) at the end of its latest monetary policy decision.

• The BoJ obviously got to a point whereby enough was enough, noting that market volatility has heightened in recent months, with a modification in the YCC parameters apparently implemented to improve market functioning (the BoJ now holds over 50% of outstanding JGBs for the first time).
• As a countermeasure to the potential for a fairly swift challenge of the BoJ’s new YCC settings it decided to deploy upsized JGB purchases in Jan-Mar ’23., as well as implementing a flurry of unscheduled Rinnban and fixed rate operations during the Tokyo session (with the fixed rate purchases also being deployed outside of the usual 5- to 10-Year zone, covering 1- to 5-Year paper). The deployment of scatter gun purchases during afternoon trade helped stem losses, with futures failing to challenge their cycle low (drawn off a continuation chart).
• JGB futures now sit ~160 ticks lower on the day nearly 80 ticks off worst levels. Cash JGBs run 2-17bp cheaper, with 10s coming under the most pressure, printing just off session cheaps at ~0.42%.
• Swaps spreads have widened across the entirety of the curve, excluding 10s, given the previous limitations placed on 10-Year JGB yields prior to today’s adjustment. There is still a ~35bp differential observable in 10-Year swap rates vs. JGB yields.
• BoJ Governor Kuroda’s post-meeting press conference provides the immediate domestic focal point.