TD Securities: BoJ Does It Again

TD Securities note that “the BoJ has tweaked the 10y JGBs trading band. The unexpected move is making its way across rates with OATs leading the way. The key for markets will be the new range that 10y JGBs make for themselves.”

• “In the previous tweak, 10y JGBs managed to hover on average at 42bp (Dec-July). Markets may want to test the BoJ flexibility at first. As the dust settles, we could see JGBs stabilizing in the 60-70bp range, which limits its impact on global rates.”
• “We believe most Japanese buying of offshore bonds in 2023 has been on an FX-unhedged basis. Any signals that JPY could appreciate materially may cause Japanese investors to sell their unhedged holdings. We still look for USD/JPY to end the year at Y132.”
• “The question also arises if the BoJ is ready to let go of the YCC - the dovish tweaks to the 2024 CPI forecast do not send much of a hawkish signal, but markets are less likely to trust the BoJ.”
• “That said, given the intense selling of foreign bonds in 2022, it reduces the pressure re: Japanese outflows, especially as we look for Fed to remain on hold.”