10-year Treasury rate logs biggest daily rise in 7 weeks amid reports of BOJ policy shift

U.S. government bond yields surged Monday, coinciding with a similar selloff in comparable Japanese bonds that was sparked after reports that the Bank of Japan was considering tweaks to make its stimulus program more sustainable.

The Japanese 10-year bond yield jumped TMBMKJP-10Y, +147.43% to 0.83% from 0.32% on Monday. That represented its largest one-day yield move in about two years, according to WSJ Market Data Group.

Meanwhile, the 10-year Treasury note yield TMUBMUSD10Y, +2.23% jumped by 6.8 basis points to 2.963%, a six-week high, to mark its largest one-day rate jump since June 1. The 30-year bond yield TMUBMUSD30Y, +2.30% picked up 7 basis points to 3.101%, also its highest rate in six weeks, and marking its largest one-day jump since May 15. Meanwhile, the 2-year note yield TMUBMUSD02Y, +1.29% rose 3.4 basis points to 2.633%, its highest since July 2008.

Bond prices move in the opposite direction of yields.

A surge in Japanese bond yields were the main story on Monday after Reuters reported that the BOJ would debate changes to its stimulus program to combat stubbornly low inflation in the region. The BOJ adopts a “yield curve control” policy that aims to hold its 10-year yield at around 0% through the use of bond purchases.

Expectations for less accommodative monetary policy from the BOJ also helped to spark selling in Treasurys. Analysts have pointed the finger at the likes of the European Central Bank and the BOJ for capping U.S. bond yields rises, as low interest rates in major overseas economies have pushed investors out of their domestic bond markets into higher-yielding U.S. debt.

See: ‘Fade’ this selloff in U.S. Treasurys, Morgan Stanley says

The Reuters report, citing people familiar with central bank’s thinking, signaled that the Japanese central bank, led by Gov. Haruhiko Kuroda, might make its first tweaks to monetary policy since 2016. Those changes, which could come as soon as next week’s policy meeting, may include shifts in its inflation target, which has been around 2%, and its stock-buying program. The BOJ next releases its policy update on July 31.

Yields on the 10-year Japanese bond jumped on the news, marking its steepest surge since around 2016. At the same time, the Nikkei 225 index NIK, -1.33% tumbled 1.3%, with the Japanese yen USDJPY, -0.06% strengthening modestly against the dollar to ¥111.42, compared against ¥111.44 late Friday in New York.

“The recent news that the BOJ is mulling some changes to its aggressively accommodative monetary policy, including some moves recently to taper its buying activity at the longer end of the JGB curve, saw the 10-year yield there gap up nearly 5 basis points,” wrote David Rosenberg, chief economist for Gluskin Sheff, in a Monday note, referring to the abbreviation widely used by bond traders referencing Japanese benchmark bonds.

“This is a really big move—biggest in two years—with some serious global implications if sustained, given what a huge exporter of capital Japan has been over the years due to its artificially suppressed government bond market,” said Rosenberg.

Meanwhile, Wall Street investors have been watching President Donald Trump’s recent tweets with Iran, where the president warned Tehran not to threaten his administration. The U.S. pulled out of an international nuclear pact forged in 2015 with the Middle Eastern oil exporter in recent weeks and sanctions against Iran are slated to be reimposed Aug. 6.

Trump’s stern admonishment to Tehran leaders follow a series of potentially market-impacting statements from the president challenging monetary policy domestically and internationally as his administration remains locked in a testy dispute with trade partners in North America, China and Europe. On Friday, Trump again tweeted that unfair tariff arrangements deals have put the U.S. at a disadvantage with its allies.

On the data front, the Chicago Fed national activity index logged a positive reading of 0.43 in June, from a negative 0.45 the previous month. The National Association of Realtors said existing-home sales came in at a 5.38 million annual pace in June, a five-month low.

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