Bank of Japan Yield Pivot Rips Across Global Stocks, Bonds

Treasury yields rose and U.S. equity futures seesawed in choppy trade after a sudden hawkish move from the Bank of Japan sent the yen soaring and raised expectations it would join its peers elsewhere in raising interest rates.

Stock futures on the S&P 500 and Nasdaq were slightly lower after paring early falls, as investors’ attention turned to this week’s housing and jobs data that could confirm the U.S. economy is losing steam, potentially allowing the Federal Reserve leeway in its rate-rise campaign. European shares also erased most of an early decline amid gains in bank stocks.

Bond yields meanwhile remained elevated, with the 10-year Treasury yield up 8 basis points and bonds from Australia to Germany also selling off. Analysts reckon more losses lie ahead as Japanese investors, major players in U.S. and European debt, have more incentive now to bring money home.

Many economists now expect the BOJ to raise interest rates next year, joining the Federal Reserve, the European Central Bank and others after a decade of extraordinary stimulus.

“Tighter BoJ policy would remove one of the last global anchors that’s helped to keep borrowing costs at low levels more broadly,” Deutsche Bank analysts told clients, noting the BOJ move had come as markets were “already reeling” from the ECB and Fed’s hawkishness last week.

The yen strengthened more than 3% against the dollar to the highest since August, while Japan’s 10-year yield rose the most since 2003.

Until now, the BOJ has been an outlier among central banks, most of which have rapidly tightened policy. The Japanese monetary authority adjusted its yield curve control program to allow 10-year borrowing costs to rise to around 0.5%, versus the previous 0.25% upper limit, bucking forecasts for no change at its policy meeting.

The yen surge pummeled the dollar which dropped against a basket of currencies, while the yen also showed notable gains against currencies such as the euro and the Australian dollar.

RBC strategist Adam Cole said moves had been amplified by positioning, with most investors still long the dollar versus yen before the BOJ meeting, meaning “covering of these yen shorts may carry the yen higher still.”

On commodity markets, the weaker dollar gave gold prices a boost, while West Texas Intermediate crude oil futures rose above $75 a barrel.

Sujata Rao reports for Bloomberg News.

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