Late last night the Bank of Japan (Japan's central bank, the BoJ) came out with their much-anticipated monetary policy decision. As I wrote on Sept 9th here highrockcapital.ca/pauls-blog/what-the-ecb-said-or-didnt-say-yesterday-and-peak-central-bank-liquidity central banks have hit peak liquidity. That is to say, further stimulus is having diminished marginal returns.
So last night, the BoJ came out and left their o/n rate unchanged at -.10%. There was hope by some that they would in fact go even more negative, but they didn't. What they did offer the market, or Japanese banks, was market control/manipulation of the yield curve in the 10+ year part of their government bond market (JGB's as they are called).
Their goal, apparently, is to steepen the yield curve so that Japanese banks, which have been battered by a flat yield curve, would have some reprieve. You see, banks typically fund themselves (take in deposits) in the very short part of the curve (o/n to 3 months) and lend in the longer part of the curve (5+ years). When the yield curve flattens substantially (long rates drop more than short rates) it hurts the bank's net interest margin. And central bankers know that having a strong banking system is integral to economic growth and stability.
What has happened to the JGB yield curve since their announcement late last night? It.....flattened more. Funnily enough, short rates went up by about 4-8bps while long rates went up by only about 1bp. The exact opposite of the BoJ's intentions. Why? Central banks are nudging up to their limits and are throwing all kinds of wet noodles on the wall to see what sticks. Tough to see below but here is the one day change in the entire JGB curve with the dark green being today's curve and the lighter yellow being yesterday's curve. Note the boxes below with the change on the day in the white box in the front end of the curve and the same in the purple box for the longer end of the curve. Not exactly the BoJ's desired policy effect.
So the BoJ may have, for now at least, failed in their goal to provide relief to their banking system. Clearly they continue to fail at resurrecting growth and inflation. That, combined with the highest debt load vs GDP ratio in the world means fiscal policy is not an option.
What does this mean for us at High Rock? As I mentioned yesterday on our webinar, we have lightened up and taken some profits in our 10yr and 30yr Government of Canada positions that we added to in the Spring (they worked very well). As per that Sept 9th blog I wrote above, something changed the past few weeks now...government bonds are trading 1:1 in lock-step with other risk assets like stocks. We will not add to our long bond exposure until we see that 1:1 correlation break and resume its normal relationship.
And of course, we have the FOMC ending their two-day meeting today at 2pm. I will be on BNN at 3:45pm for five minutes with Catherine Murray and I am sure that will be the topic of the day for her.