Goldman Sachs are wary that continued Bank of Japan YCC leaves instruments the BOJ is not targeting vulnerable.

GS point to the sale of 20-year JGBs this week getting a lukewarm reception only

  • bid-to-cover ratio dropped
  • the gap between 20-year bonds over 10-years is close to its widest since February 2016 (Bloomberg data)

Last week, in its policy statement, the Bank of Japan again affirmed its yield curve-control policy holding 10-year yields capped. But:

  • longer-dated yields, not capped, have climbed
  • such curve steepening may, eventually, force the BOJs hand to weaken YCC
  • “The markets/BOJ stalemate will for now mean continued pressure on portions of the yield curve that are less directly affected by central bank intervention, either in swaps or maturities beyond the 10-year point,”
  • other market dislocations could persist as long as upward pressure on global bond yields remains
  • “The potential ineffectiveness of futures as a hedging venue for JPY rates risk could not only mean reduced liquidity in these futures, but also more market fragmentation,” they wrote. “If the BoJ wants to address this broader dislocation and further potential weakening of the yen, it may ultimately have to revisit its YCC framework.”

Info via Bloomberg, gated