BoJ: A Taste of What Lies Ahead

Japan’s worst 10-year auction in three years sent yields spiking across the curve and, indeed, around the world.  As the BoJ’s stealth taper comes out of the shadows, JGB’s rose 6 bps and the 2s10s steepened about 6 bps. German bunds rose 5 bps while UK gilts rose 7 bps and US 10Ys rose about 6 bps.Not only did the BoJ suggest it will slash purchases going forward, the GPIF said it would shift as much as 1.3 trillion in future bond purchases to FX-hedge foreign bonds.The yen weakened on the news, which was enough to provide at least a temporary boost in the Nikkei and US futures.  But, our charts still show a very sharp drop in TNX directly ahead, a case now strengthened by the GIPF’s shift in allocation.If a reduction in QE causes stocks to rally, it would portend a seismic shift in central bank intervention and a resumption of the currency race to the bottom. The only problem: the world can ill afford higher interest rates or even steeper yield curves.  I remain bearish.

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