JPY Rates Decouple From The Global Rally

Goldman Sachs write “while the rates market dynamics are strongly indicative of positioning for an eventual adjustment (if not end) to YCC policy, relative underperformance has supported a notable reversal in the JPY.”

• “Our economists view the shifts in BoJ messaging in recent months as an attempt at greater flexibility under new leadership.”
• “In terms of plausible adjustments, we see a widening of the 10-Year YCC tolerance band as a possibility, although with a less than even chance of such as change occurring in the near-term. Our economists see a far lower hurdle to adjusting current policy rate guidance.”
• “Given that 10-Year OIS rates are already in the vicinity of our fair value estimate for 10-Year JGB yield, we believe that even if there was a full exit of YCC, it may translate to a more limited impulse onto global duration.”
• “Further, the relative appeal of JGBs even at current levels may limit the extent of any selloff, particularly at longer maturities, which compare favorably to FX-hedged alternatives.”
• “More immediately, at the upcoming BoJ meeting, tweaks to policy seem somewhat unlikely, which could translate to some moderation in the recent underperformance of JPY rates. However, given our global duration view, and the focus around upcoming the BoJ leadership change, we are likely to see sustained interest in positioning for a potential YCC adjustment, supporting higher vol. premium, wider 10-Year spreads and steeper curves well into next year.”