Goldman Weigh In On The Post-YCC Tweak Landscape

Goldman Sachs note that “the relaxation of the YCC band should have only a modest impact on 30-Year JGB yields, given that these yields were not targeted by the BoJ, and already reflect the reset in global long term yield levels. At the front end, there could be an indirect effect - investors' anticipation of a potential exit from NIRP should result in more risk premium in short term rates, with market yields likely trading well above modal projections for the policy balance rate.”

• “In terms of our JGB yield projections, expect 10-Year JGB yields will remain capped at 50bp for the foreseeable future, though we agree with market anticipation of upside risks in the event of a full YCC exit. In the latter scenario, we could see these yields exceed our 70-80bp fair value range temporarily.”
• “Ahead of any policy changes, we believe mounting speculation about an exit from NIRP could lead to bear flattening pressure in front/intermediate curves.”
• “At the long end, we see some follow-through of the bear flattening of the 10s30s JGB yield curve witnessed post-BoJ; after all, 10-Year JGB yields are still currently below both the yield cap and fair value, and still have some catching up to do. However, once the YCC cap becomes binding again, we expect the long end curve to again start trading with a steepening bias.”