YieldriseandBOJpolicy

US treasury yields are up and away. The US 10-year yield is currently trading at 1.70 having touched a high of 1.75 in the trading yesterday. This was the highest since January 2020. The 30-year treasury yield also touched 2.5% which was the highest since august 2019. Now this was a day after the FOMC policy meeting where the unequivocal message was that we are not going to raise rates in the near future. Inflation even if it comes will be transitory and the day of easy liquidity are far from over. But the markets seem to be betting that Fed with all its tools can surely control the short end of the curve, but the longer end is something too far in future and not in control of exactly anyone. Hence the longer end is getting sold off and bond traders in the process of shortening the duration of their portfolios. The problem is that selling begets more selling and can really convert into a stampede.

Powell in his press conference has conveyed the message that they don’t want the yield movement to become disorderly and will use the full extent of their tools to ensure the same. Which tools and when, was a question which he chose to deflect for the time being. The central mantra was price stability and full employment. The first action point which we can envisage might be on extending the SLR exemption for the banks. The exclusion of treasury assets from the definition of supplementary leverage ratio currently allows banks to hold more treasury in their books than what they would have done normally. As the future spending will require more issuances, more buyers with more appetite are needed. More is the operative word here. This announcement must come before 31^st March as it is the deadline for the relief automatically expiring.

Action in the US yields has certainly impacted the stock markets around the world. The Dow, Nikkei, Hang Seng all are trading in red. Dollar Index has again inched up, pushing close to 92 levels. On the data front, the US initial jobless claims again went up as 770k people applied against the expectation of 700k. Initial jobless claims is a number which captures information about new filing for unemployment benefit. These are the people who lost their jobs recently. Any spike here indicates that the reopening is patchy.

The BOJ is expected to come out with their policy decision today. Markets are looking keenly towards one adjustment which the BOJ is expected to make. It might announce to widen the target range on the 10-year yield from 0.2% to 0.25% on either side of zero. This might look like a small adjustment but might signal the BOJ’s acceptance with inevitability of rise in yields. Indian 10-year yield is down 2 bps from yesterday more in response to the salutary effect of the drop in oil prices overnight.