Sovereign debt takes a hit after BoJ’s shock policy move

Global government debt markets dropped on Tuesday after the Bank of Japan surprised markets by unexpectedly adjusting its policy of pinning long-term bond yields at ultra low levels.

The move sparked a sell-off in government debt, with the yield on Japan’s 10-year bonds surging by as much as 0.2 percentage points to 0.47 per cent, its highest level since 2015, before easing to 0.41 per cent.

Other sovereign debt yields climbed higher, pointing to a fall in price. The yield on 10-year US Treasuries climbed to a three-week high of 3.65 per cent, while UK 10-year gilt yields rose almost 0.1 percentage points to 3.58 per cent and Germany’s 10-year Bund yield rose to 2.26 per cent.

Japan’s yen jumped 3.6 per cent to trade at ¥132.2 against the US dollar. The pound was flat against the dollar.

The BoJ widened the range in which it allows 10-year bond yields to trade, letting them fluctuate by plus or minus 0.5 per cent, instead of the previous 0.25 per cent. The country first enacted its “yield curve control” policy in 2016 and the 0.25 per cent upper limit has been in place since 2021.

BoJ governor Haruhiko Kuroda denied the move marked a pivot away from Japan’s ultra-loose monetary policy. He said: “Adjusting the [yield target] does not signal the end of YCC or an exit strategy.” The BoJ kept overnight interest rates at minus 0.1 per cent, setting it apart from other key central banks that this year have been raising rates rapidly in an effort to tackle high inflation.

Tohru Sasaki, head of Japan market research at JPMorgan, said the BoJ’s move was borne out of concern about the effect that volatility in global markets was having on Japanese markets. “If a market malfunction is also an important reason for today’s move, a further move may follow because just a 25 [basis point] move cannot end or improve the malfunctioning,” he added.

“It’s important not to underestimate the impact this could have, because tighter BoJ policy would remove one of the last global anchors that’s helped to keep borrowing costs at low levels more broadly,” said Jim Reid, head of global fundamental credit strategy at Deutsche Bank.

The BoJ’s shock move also sent equity markets lower. The Europe-wide Stoxx 600 index fell 0.4 per cent while London’s FTSE 100 lost 0.1 per cent. In Asia, Japan’s Topix index dropped 1.5 per cent. Contracts tracking Wall Street’s S&P 500 fell 0.2 per cent, while those for the Nasdaq 100 were 0.3 per cent lower.