US 10-year yields near the highs of the year

Yields have risen this week as CPI numbers stayed hot but that doesn’t tell the whole story. Many in the bond market watching the Bank of Japan and that’s why yesterday’s weaker retail sales report didn’t have much of an effect.

The leaks from the Bank of Japan have continued to mount suggesting action next week. That was compounded by government talk of normalization today and wage gains of 5%.

All the elements are now in place and it means that BOJ will be dropping negative rates and yield curve control. That’s less global bond buying and will leave the private sector to soak it up.

There’s some question whether the BOJ will actually hike next week or strongly signal a hike at the following meeting but — effectively it might not mean much. Here’s what BMO wrote yesterday about the BOJ trade.

“The relatively muted
response to the looming BoJ shift has primarily served to reinforce our
perception that it will be a nonevent for US rates – outside of a
well-contained kneejerk backup in yields that’s most likely already been
absorbed. We’re increasingly of the mind that this week’s price action is the
‘sell the rumor’ half of the time-tested strategy, leaving next week as a
classic ‘buy the fact’. In this scenario, the operative facts could be a
hawkish FOMC, fewer cuts signaled for 2024, and a BoJ readying to hike (if not
actually delivering).”

Given that yields are bumping up against resistance here and there’s no US data coming ahead of the Fed (which is now expected to be hawkish and lower expected cuts to 50 bps from 75 bps), there’s a case for buying bonds here.