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Domestic banks and financial institutions for small businesses critical to size of cuts in BoJ bond purchases
The 10-year JGB yield trades with an upward bias in July. With a key Policy Board meeting scheduled at the end of the month, many news reports speculate about the BoJ’s detailed plan for "sizeable" reductions in its bond purchases, and others discuss the possibility of additional rate hikes based on leaked information. Bond market worries about monetary policy revisions reach fever pitch, and conditions are conducive to upward pressure on yields as investors refrain from active dip-buying despite attractive prices. The 10-year JGB yield is also pulled higher by its US equivalent as expectations of a Fed rate cut before the end of the year start to fade. However, any upside for yields is limited. The market has largely priced in another BoJ rate hike to 0.25%, and the 10-year JGB yield comes under downward pressure if renewed expectations of a 2024 Fed rate cut send the 10-year US Tyield lower. If official intervention or some other development succeeds in halting the sustained decline in the yen, investors who had been selling bonds in anticipation of rate hikes aimed at defending the yen buy them back, pushing the10-year JGB yield lower. The 30-year JGB yield trades at a level that keeps the10s30s JGB spread around the key psychological level of 120bp.
