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Goldman Sachs: Heightened Market Speculation On Further BoJ Actions

JGBS

Goldman Sachs note that “markets appear to be placing relatively high odds of at least another adjustment to, if not an outright exit from YCC – 10-Year swap rates are at 1%, and JGBs that the BoJ is not explicitly offering fixed-rate operations on are trading above the upper end of the BoJ’s tolerance band.”

  • “The elevated pace of buying does not appear to be sustainable and will likely deplete private sector bond market inventories - implied repo rate of the CTD into JGB futures widened about 5.5%, though not quite to the ~7% level in the run-up to the BoJ meeting last June.”
  • “More broadly, while we expect JGBs close to the current 10y (8- to 9-Year maturities) to continue to trade poorly going into the meeting, we note that short of a “full” YCC exit (or indication of such actions in the future), markets could reverse some of the run-up in yields shortly thereafter.”
  • “In terms of impact of potential changes, tweaks, such as a further 25bp widening of the tolerance band, are unlikely to have large spillover effects to other G10 yields (much as was the case with the last adjustment). However, indications of a more substantive exit from easy monetary policy, to the extent it turbocharges yen appreciation, could result in an acceleration of Japanese investors’ unhedged foreign bond portfolios, thereby producing larger spillovers effects.”
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com

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