Steepening Gets Unwound As BoJ Boosts Bond-Buying But Futures Pare Gains

The BoJ demonstrated its commitment to ultra-easy policy and used bond-buying operations to enforce its yield target. The Bank unexpectedly raised the size of 5- to 10-Year JGB purchases to Y800bn from the planned Y500bn to reinforce its impact on benchmark 10-Year yield, which on Monday breached the 0.25% cap. While the yield on 10-Year JGBs remained virtually flat in anticipation of the operation, the super-long end of the curve witnessed heavy selling, with the 10-/30-Year JGB yield spread widening to more than 100bp. With speculation re: potential action on the super-long end doing the rounds, the Bank followed up by tweaking its Rinban plan for Wednesday, increasing the sizes of scheduled purchases across 1-3, 3-5 & 5-10 Year baskets and adding operations covering 10-25 & 25+ Year JGBs. In a final step, the Bank offered to buy 10-25 & 25+ Year JGBs in an unscheduled operation in a bid to rein in rising super-long yields.

• Action to enforce the YCC framework comes ahead of Friday's BoJ monetary policy meeting, lending support to expectations that officials will keep the main policy parameters unchanged, sticking with their ultra-loose stance.
• JGB futures crept higher from the off, as participants awaited BoJ reaction to 10-Year yield testing the ceiling of the Bank's tolerance band. JBU2 ran as high as to 148.39, but then staged a firm pullback in the wake of the BoJ's final bond-purchase announcements. It last trades at 147.90, 60 ticks below previous settlement.
• Powerful use of bond-buying proved effective, with initial bear steepening largely, albeit not fully, unwound. 10-/30-Year JGB yield spread is back from highs (101.4) and last sits at 93.3bp as super-long yields pared gains and 10-Year yield remained near 0.25%.
• Domestic data and an auction for off-the-run JGBs with 15.5-39 Years until maturity were overshadowed by BoJ action.