Published: Thu, August 02, 2018
Markets | By Otis Pena

Bond yields drop as Bank of Japan remains dovish

Bond yields drop as Bank of Japan remains dovish

In an apparent move to keep yields from rising too much on expectations of future policy normalisation, the BOJ adopted forward guidance on policy rates that pledges to keep rates low for the time being.

Spreadbetters pointed to a dour mood elsewhere, with London's FTSE futures FFIc1 off 0.7 percent and E-Minis for the S&P 500 down 0.3 percent.

The markets are now eyeing the upcomingannouncements by the Bank of Japan (BOJ) that will include their Outlook Report, rate decision, Monetary Policy Statement, and 10-year bond yield target.

Germany's 10-year government bond yield DE10YT=RR , the benchmark for the euro zone, rose more than 4 basis points to a six-week high of 0.46 percent.

In response, yields on 10-year Japanese government bonds fell 3 basis points, and 40-year yields slid almost 9 basis points, pushing 10-year United States and German yields down around 2-3 bps.

However, the reaction in currencies was muted as some market participants awaited further clarity.

Just the chance of such a shift has sent the yen higher in the last week or so, leaving the dollar around 111.13 yen JPY= from a peak of 113.18 earlier in the month.

Against a basket of currencies, the dollar moved in tight ranges.

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"The BOJ said it would allow long-term rates to fluctuate, and this is a key point as we can no longer pinpoint how bond-buying operations are conducted going forward", said Noriatsu Tanji, chief bond strategist at Mizuho Securities. "That is as vague as it can be", said Rodrigo Catril, senior forex analyst at National Australia Bank.

"Tech really began cracking on Tuesday before the floodgates opened on Friday", they wrote in a note.

The two-year Treasury yield rose to a decade-high of 2.69 percent towards the end of last week. "That will set a tone for the market".

The Japanese yen is now slightly weaker against all major currencies except the Australian dollar. European tech followed suit, losing 0.4 per cent and lagging broader equities that started the day flat. South Korea's Kospi index added 0.1% after spending most of the day in the red.

Disappointing updates from US tech heavyweights overshadowed solid results elsewhere, helping knock European shares off six-week highs, while a MSCI index that tracks shares in 47 countries pared losses to trade flat. Chinese shares were mixed with Shanghai's SSE Composite up a touch while the blue-chip CSI300 off 0.2%.

In Japan, the Nikkei 225 poked up 8.88 points to 22,553.72, on the back of the Bank of Japan's policy decision.

"The BOJ decision was not meant to raise interest rates", said Kuroda at a press conference, adding that the move was aimed at increasing the sustainability of the bank's massive stimulus program.

The British pound held at US$1.3126, drifting higher from a more than 10-month trough of US$1.2955 touched earlier in July.

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