U.S. Treasurys rose Tuesday, pushing long-dated government yields lower, after the Bank of Japan affirmed its easy-money policy prescription, leaving the country one of the last with an aggressively accommodative plan in place a decade after the 2007-’09 financial crisis — an environment that can make richer-yielding Treasurys more attractive.
The BOJ’s latest policy update comes just ahead of the Federal Open Market Committee, which is set to update its statement on Wednesday afternoon, offering fresh guidance on the economic outlook — if not a rate hike — which could influence fixed-income trading.
On Tuesday, however, Treasurys mostly took their cues from Japanese 10-year government paper, which rallied by the most since 2016, pushing sovereign debt rates decidedly lower.
The Japanese 10-year note TMBMKJP-10Y, -53.51% yielded 0.044% late Tuesday in New York, compared to 0.106% on Monday, according to FactSet data. The yield moves represent the sharpest since about 2016. Yields on 10-year Japanese bonds had been at an intraday peak at 0.112% just ahead of the BOJ decision, before retreating.
Bond prices rise as yields fall.
The 10-year U.S. government bond yield TMUBMUSD10Y, -0.44% fell 1.1 basis points to 2.964%, the two-year note yield TMUBMUSD02Y, +0.61% was virtually unchanged at 2.669%. The 30-year bond yield TMUBMUSD30Y, -0.83% or long bond, slipped by 2.1 basis points to 3.085%.
“The long end of the Treasury market regained its legs after the BOJ rate policy decision reinforced forward guidance and maintained a zero target on 10yr yields,” wrote Tom di Galoma, managing director for Treasurys trading at Seaport Global Securities, in a Tuesday research note.
Treasurys reacted after the BOJ, led by Gov. Haruhiko Kuroda, vowed to maintain longstanding strategies, albeit with tweaks, including incorporating forward guidance for the first time, with an emphasis that it intends to maintain rates at ultralow levels for an “extended period of time.”
During a news conference following its policy statement, Kuroda said the BOJ would allow a wider range around its target of zero for the yield on the 10-year Japanese government bond, according to The Wall Street Journal. The central-bank boss said the target would remain zero, but would be allowed to rise to a range as wide as 0.2%, compared with a range between minus-0.1% and 0.1%, in a nod to criticism that the bank’s efforts to maintain superlow levels were taxing the central bank and weren’t sustainable.
Kuroda & Co. said policy makers would buy government bonds at an annual pace of around ¥80 trillion ($720 billion) — a statement investors see as a gauge of the bank’s commitment to easing.
The tweaks ultimately mean that the BOJ, which continues to struggle to nudge its annual inflation target to around 2%, will be a buyer of assets, a fact that is viewed as bullish to bond prices. For that reason, the BOJ dialed back its inflation forecasts. It sees core inflation rising just 1.1% through March, compared with 1.3% previously, and is projecting inflation will hit 1.5% from 1.8%.
For the month, Treasurys climbed as the Dow Jones Industrial Average DJIA, +0.43% , S&P 500 index SPX, +0.49% and the Nasdaq Composite Index SPX, +0.49% posted monthly gains, reflecting appetite for risk rather than the perceived safety of Treasurys. The two-year rose 14.1 basis points in July, while the 10-year advanced by 11.6 basis points over the same period and the 30-year bond climbed 11 basis points. All three maturities saw their largest monthly rate gains since April, according to WSJ Market Data Group.
Meanwhile, the spread between the 10-year note yield and the seven-year note TMUBMUSD07Y, -0.30% narrowed to 3.5 basis points, or 0.035 percentage points. A flattening yield curve is often a feature of a rising rate environment. A flattening curve also can spur worries about an economic slowdown.
Investors will now turn their attention to the Fed on Wednesday and later to the nonfarm-payroll report on Friday.
“FOMC should be quiet without a press conference, but they should set up a hike in September,” wrote Thomas Simons, market economist at Jefferies, in a Tuesday research note.
“This week is about month-end, FOMC and then payrolls. With stocks rallying this month and Treasuries selling off, there should be some rebalancing needs into month-end,” he wrote.
Although the Jerome Powell-led Fed isn’t expected to raise rates at the conclusion of this coming FOMC gathering, investors will look for insights about the health of the economy and the impact of tariff clashes and fiscal stimulus measures endorsed by the Trump administration.
On the economic-data front, bond investors digested key measures of inflation, including the Fed’s preferred gauge, the personal-consumption expenditures price index, or PCE.
Consumer spending rose 0.4% in June. The PCE index, the Fed’s preferred inflation gauge, rose a scant 0.1%, the government said Tuesday. The employment cost index for the second quarter rose 0.6%, a tick below the MarketWatch estimate of 0.7%. The S&P/Case-Shiller national index rose a seasonally adjusted 0.4% and was up 6.4% for the year in May. A measure of regional manufacturing activity in Chicago came in at the highest in six months. The consumer confidence index came in at 127.4 in July, compared with 126.5 in the previous month.Want news about Asia delivered to your inbox? Subscribe to MarketWatch's free Asia Daily newsletter. Sign up here.
