Japan's central bank maintains bond purchases after earlier jolt, JGBs bounce

13 January, 2018, 01:00 | Author: Keith Rowe
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The rising yields led Bill Gross of Janus Henderson, whose renown as a bond investor came to define the multidecade bull market for fixed-income securities, to pronounce the start of a bear market for bonds, although he said on Wednesday that he did not foresee drastic losses.

MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.5 per cent after six straight days of gains that had taken it within a stone's throw of the record high touched in November 2007.

The dollar has been struggling to gain traction in the opening days of 2018 after losing around 10 percent against a basket of currencies past year as economic growth elsewhere, notably Europe, overtook the U.S.

The reports out of China in particular made investors nervous, coming as they did on top of the recent adjustment by the Bank of Japan of its bond buying program helped accelerated the selloff in U.S. treasuries, with the United States 2 year yield hitting a nine year high, while the 10 year yield pushed up towards 2.6% and the highs seen last year, though they have since slipped back.

U.S. markets had their first uniformly negative session of the year so far yesterday, all of the main benchmarks finishing the day lower on the day, on reports that China was reviewing its policy of buying U.S. treasuries.

That marked a turnaround after China burnt through almost US$320 billion in 2016 to defend the yuan, which fell 6.5 percent against the surging dollar. The billionaire bond manager said after the market closed that the 10-year yield could head higher if it traded past last year's high of 2.63 per cent with 3.25 per cent "plausible" some time in 2018.

The analysts said in the note a global recovery and potential central bank action are possible drivers of a sustained sell off in bonds, though they stopped short of saying that this trend has begun. "It appears China is quick to touch the Achilles heel of the States", he added.

A separate probe into Chinese intellectual property practices may also conclude as early as this month, Axios reported, and could result in tariffs on the country's consumer-electronics exports.

Not only would such a step hurt China by decreasing the value of its bond holdings, it would wreak havoc in a global economy that the country is now fully integrated into through deep trade and financial links.

"There is no evidence that China has been "slowing down or halting purchases of USA treasuries". On Tuesday, the Bank of Japan said it would trim its purchases of Japanese government bonds, raising speculation it will reduce its monetary stimulus this year.

Sterling was down, with decreasing 0.20% to 1.3512.

"When they (the BOJ) reduced their bond-buying yesterday, people suddenly thought maybe we've underestimated the BOJ, maybe we should pay more attention to what their future policy path should be like ... and I think it's caused a re-evaluation of risk in bond markets".

Brent crude futures traded at $69.03 a barrel, down 17 cents, after rising as high as $69.37 on Wednesday, highest since May 2015. Its session high of $US1,326.56 was its highest since September 15.



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