Why U.S. stocks and bonds stumbled on talk of a Bank of Japan policy tweak
The “ultimate fear” is that Japanese investors, who have vast holdings of U.S. fixed income, including Treasury notes and other securities, “begin to see a higher level of yields in their own backyard,” Torsten Slok, chief economist at Apollo Global Management, told MarketWatch in a phone interview.
That could prompt heavy liquidation of those U.S. positions as investors repatriate holdings to reinvest the proceeds at home.
MarketWatch 28 uly 2023
Why U.S. stocks and bonds stumbled on talk of a Bank of Japan policy tweak - MarketWatch
Land of the Rising Yields Gives Markets a Shock
Yield Curve Control (YCC), or intervening to keep 10-year yields down, has been in force for seven years, and the current target of 0.5% had been in place for seven months. The BOJ has now decided to control yields “more flexibly,” which means in practice that it will now tolerate yields as high as 1%, double the previous limit.
By buying every 10-year bond in sight, the BOJ has been injecting cash into the global financial system, and keeping rates low.
There’s also the risk of some serious pain for those who’d been speculating. The carry trade (shorting the yen and parking in the likes of the Brazilian real and Mexican peso) had been making money like the Nasdaq for the last couple of years. Carry trades can reverse quickly, and that would hurt.
By reducing the liquidity flowing from Japan, the job of other central banks grows easier. They have less need to hike in future.
John Authers Bloomberg 28 July 2023
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