We left a 2022 with a multiplicity of unthinkable events. Added to this is the Bank of Japan widening the intervention bands in its sovereign bond curve. Sounding hawkish (monetarily restrictive). At the monetary policy level, Japan has been implementing YCC (“yield curve control” or interest rate curve control) for some time. What does this imply? That the Central Bank of Japan buys or sells its sovereign bonds until it reaches the target rate it seeks at each point on the curve. To cite an example, if for the 10yr yield in Japan the market decided to abruptly sell the bonds forging a rise in their rate of return above the limit accepted by the Bank of Japan, then said institution would intervene by buying the bond until it brought it to the level desired yield. So, for Japan’s 10yr yield, the Bank of Japan increased the maximum intervention range from 0.25% to 0.50%. And this generated pressure on all the long rates of the main economies of the world. That is to say that, apparently, the Bank of Japan will let its 10-year rate run up to 0.50% per year. If the market moved Japan’s 10-year rate to that level, the Bank of Japan would intervene by buying Japan’s 10-year bond and stopping its yield from rising. This is why the market reads it as “hawkish”.
Reason for which, a new “impatience” for long rates at an international level germinates. In particular, the US 30-year rate. This is a key parameter for valuing risky assets and therefore has a very significant impact on their valuations. If Japan gave up curve intervention (YCC), all long rates globally could go up a lot. It is difficult to determine if what the Bank of Japan has done is a prelude to the definitive abandonment of the curve intervention strategy, which would link to long rates in Japan running as far as the market decides. If that were to happen, it would be negative for the global stock market. Japan’s decision generated an initial appreciation of the yen close to 4% and began to motivate a rotation from bonds designated in dollars and euros towards Japanese sovereigns in search of what appears to be a (sustainable) appreciation trend for the yen. This migration (selling) from bonds in dollars or euros to bonds in yen founded a jump of more than 25 basis points in the long end of the curve of the United States and Germany, which has been a very violent movement that nobody had on the radar at the close of 2022.
For now, In the US, it looks like disinflation is underway even though the Fed is telling us otherwise, especially given the macroeconomic forecasts it released at the FOMC on December 14. It is sensible not to rule out strong slowdowns in inflation in 2023, although it must also be taken into account that it is a slow process. However, no forecast from the Fed or major investment banks came anywhere close to predicting what will happen in 2022, so the Fed’s new hawkish forecasts may also be wrong. In this way, the Bank of Japan joins the ECB (European Central Bank) and the Fed (Central Bank of the United States), in a year in which the three have been hawkish (monetarily restrictive) breaking everything they could. The ruptures in the valuations of financial assets have the purpose of generating a negative wealth effect that slows down consumption and, in this way, contributes to disinflation. Therefore, the decision of the Bank of Japan formed a rise of about 25 basis points in the long part, for a world that for a year has been suffering from the monetary restriction imposed by the Fed. Looking to 2023, the 30yr in the United States, despite all the risks involved, it seems to make sense not to imagine it above 4% on average. How much higher or lower will depend on how recessive 2023 will be. We missed a very restrictive 2022, dominated by an inflationary obsession from the Fed, and a 2023 begins that at some point will probably mutate to dovish (monetarily lax). So 2023 will be another year very dominated by the macro.
Federico Pablo Vacalebre is a professor at the CEMA University
by Federico Pablo Vacalebre
