The Phaserl


Brace For “VaR Shock” – How The Bank Of Japan May Be About To Unleash A Global Selloff

from Zero Hedge:

“The impact of the BOJ’s stimulus is that the bond markets worldwide are becoming one market. If there’s a reversal of policy, you can’t rule out that it would roil global debt” said SMBC Nikko Securities. “It would definitely see some pain” added Old Mutual Global.

As we pointed out recently, Japan has been quietly undergoing a mini bond tantrum as over the past two months, its sovereign debt suffered the worst rout in 13 years, handing investors bigger losses over the past two months than any other government bonds, amid speculation the Bank of Japan plans to change its asset-purchase strategy.

The selloff started in late July, around the time the time the BOJ disappointed with its latest announcement, and accelerated on fears that as part of its “comprehensive assessment” of its policies, the central bank would set back the BOJ’s monetary easing stance. 

It then resumed in late August, after central bankers made another coordinated push for fiscal stimulus at Jackson Hole, which would mean more sovereign debt supply, and thus lower prices, all else equal. Then earlier this week, Kuroda said that a review of the current stimulus efforts due by the Sept. 20-21 policy meeting in which some analysts and investors read between the lines that the BOJ may be seeking to force a shift toward a steeper yield curve after the gap between two- and 30-year securities compressed to a record 30 basis points.

Kuroda on Monday also pointedly flagged concerns about negative potential effects from the slide in long-maturity bond yields. Earlier this year, rates as long as 20 years touched zero percent. The BOJ chief noted that the drop hurt returns on pension programs, and could affect confidence levels and the economy more broadly.

As Kuroda said, clearly highlighting the dangers of a flatter yield curve, “some business firms have revised down their profit forecasts due in part to the increase in the net present value of retirement benefit obligations. We should take account of the possibility that such developments can affect people’s confidence by causing concerns over the sustainability of the financial function in a broad sense, thereby negatively affecting economic activity.”

These hints prompted Evercore ISI analysts to suggest that Japan’s central bank in coming weeks will modify its stimulus program to alleviate risks from ultra-low long-term yields, by pursuing a reverse “Operation Twist”, where the central bank sell long-end bonds while buying the short-end.

The change would help to make the Bank of Japan’s easing more sustainable over the longer haul, given diminishing chances of hitting the 2 percent inflation target soon, according to the analysis by Evercore ISI’s Krishna Guha and Ernie Tedeschi. “The BOJ’s policy review will point to a rebalancing of its monetary policy aimed at maintaining or increasing downward pressure on short-to-medium term real interest rates (and in turn put downward pressure on the yen) while engineering a steepening of the yield curve,” Guha and Tedeschi wrote in a note.

To avoid market fears that the central bank is seeking an outright tightening of monetary conditions, which a “reverse Twist” would suggest, the BOJ may cut short rates further from the current -0.20%. A cut in the already-negative benchmark rate, levied on a portion of banks’ reserves parked at the BOJ, which would also steepen the yield curve, could show the BOJ is still implementing unvarnished stimulus. The Evercore ISI analysts, cited by Bloomberg, said a rate cut could come either this month or later in the year.

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