Bank of Japan Policy Meeting Preview – Chance Of A Bond Crash?

Excerpted via Bill Blain of Mint Partners,

The current Bank of Japan policy meeting is possibly the most important thing going on this week (even more so than Bernanke’s comments perhaps). If, as is distinctly possible, they don’t do anything to reinforce the immediacy of the Kuroda QQE package, we could be looking at bond markets reacting in a most “unfavorable manner”.  The effect would be to reinforce the latest round of ‘fear-on’ bond selling – certainly over the short-term, and the damaged sentiment could impact stocks also.

That’s why the Bank of Japan policy meeting today/tomorrow will be so interesting. Can it nurture and sustain real growth? Devaluing yen to benefit exporters does seem to be working – look at recent Yen corporate results. However, now we’ve got the rest of Asia looking to balance Japan’s competitive devaluation. We still need to see how the other side of Abe-onomics works: rebuilding Japan. How vulnerable is the BoJ game? The Nikkei may be massively higher, but interest rates and JGB’s remain stubbornly volatile and high – a factor conflating the global bond worries… if the Fed is going to end QE and Japan’s QE squared isn’t working, then bond players will quite rightly capitulate.

There is probably not much the BoJ can say at this meeting – it’s got to give the policy (of massive QE) time to work. That leaves markets highly vulnerable to a sense of disappointment tomorrow. On the other hand, we’ve long said.. “Don’t fight Kuroda!”

Whatever happens in the Japan story; how much longer the Fed keeps up the buying, and the implications on Global QE remain the main themes and drivers of the current market. The question is, for how long might markets be put on the back foot by the continued weakness in JGB and knock on effects. [let alone Europe]

Back in the bond market, over the last few days the search for yield does seem capped. There have been some stumbles in new issues, and we’re encountering reluctance from buyers to engage some excellent client offers for the highest yielding names like Greece or Slovenia. We’ve seen limited interest in relative spread trades – for instance privately placed Canada risk at a significant spread over the underlying provincial names. That all tells me the bond market is nervous.


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