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Bond Report: 10- and 30-year Treasury yields reach almost three-week highs after Bank of Japan’s surprise shift

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Ten- and 30-year U.S. bond yields jumped for a third straight session on Tuesday after a policy shift by the Bank of Japan sparked a selloff in government debt, prompting analysts to speculate that the central bank may give up its role as last-remaining low-rate anchor.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.265%

rose less than 1 basis point to 4.264% from 4.260% on Monday. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.688%

jumped 10.2 basis points to 3.683% from 3.581% on Monday afternoon.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.737%

advanced 11.3 basis points to 3.735% from 3.622% late Monday.

Tuesday’s levels were the highest for the 10- and 30-year rates since Nov. 30, based on 3 p.m. figures, according to Dow Jones Market Data.

What drove markets

The Bank of Japan surprised the market on Tuesday by saying it was relaxing its bond yield curve control and would now allow the 10-year government debt yield
TMBMKJP-10Y,
0.417%

to fluctuate by plus or minus 0.50% from a previous range of plus or minus 0.25%.

Read: Why the Bank of Japan’s surprise policy twist is rattling global markets

BOJ Gov. Haruhiko Kuroda later said that the adjustment doesn’t amount to a tightening of monetary policy, though observers saw the move as at least a step on the path away from the central bank’s ultraloose strategy. Meanwhile, BOJ policy makers kept their overnight interest rates at minus 0.1 percent.

The yield on the 10-year Japanese government bond, or JGB
TMBMKJP-10Y,
0.417%
,
jumped 16.2 basis points to 0.418%, causing yields to rise across the global market. German 10-year yields
TMBMKDE-10Y,
2.304%

rose 10.1 basis points to 2.305%.

The BOJ move comes as other major central banks, such as the Federal Reserve and European Central Bank, have already started sharply tightening monetary policy to combat high inflation.

Markets are pricing in a 69% probability that the Fed will raise interest rates by 25 basis points to a range of 4.50% to 4.75% on Feb. 1, according to the CME FedWatch Tool. The central bank is mostly expected to take its fed-funds rate target to at least between 4.75% and 5% by May, according to 30-day fed-funds futures.

In Tuesday’s U.S. economic releases, building permits for new homes fell 11.2% to 1.34 million in November, while housing starts dipped slightly by falling 0.5%.

What analysts are saying

“The Fed, European Central Bank (ECB) and Bank of Japan (BoJ) have all delivered hawkish surprises over the past week. We would rate the ECB and BoJ as first-order shocks given the dramatic change in tone,” said Steve Englander, head of global G10 FX research and North America macro strategy for Standard Chartered Bank.

In the U.S., “we think the fed funds target rate is near a peak, but this may not be clear until labor-market deterioration is more visible,” he wrote in a note.

Economic Report: Inflation appears to be slowing, but the Fed isn’t turning down the heat

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