Yield on 10-year JGBs edge lower as BoJ shoot theories of early reduction in QE

Japanese government bonds gained on Wednesday as Bank of Japan announced it was keeping its monetary policy setting unchanged, shooting market theories of an early reduction in QE. Also, firmness in the U.S. Treasuries supported the safe-haven buying.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 1/2 basis point to 0.073 percent, the yield on the long-term 30-year note traded nearly flat at 0.826 percent and the yield on short-term 2-year remained steady at -0.134 percent by 04:00 GMT.

On Tuesday, the BoJ maintained its short-term interest rate at -0.100 percent and remained committed to keeping the 10-year JGB yield near zero. The central bank, in its monetary policy statement, stated that it would expand its monetary base until inflation becomes stable at or above 2 percent.

The central bank is under little pressure to adopt additional action even though inflation remains well below the BoJ's 2% target range. We think it is still premature for the BoJ to change its policy framework, but expect the board to start discussing how it can add flexibility to its 10-year JGB yield targeting policy.

Moreover, in its daily open market operation held on Wednesday, the Bank of Japan bought JPY250 billion of to 1-3 year JGBs, JPY300 billion worth of bonds of 3-5 years of maturity and JPY410 billion worth of bonds of 5-10 years of maturity.

In the United States, Treasuries saw upward pressure across the curve during a relatively quiet session light on economic data of great significance. On the data front, markets were largely limited to a lackluster Richmond Fed manufacturing activity index release, decreasing to 14 in January, from 20 in December and a well-subscribed 2-year Note auction. Markets now await a light flow of data on Wednesday, highlighted by existing home sales and Markit US/services PMI data, followed by a 5-year Note auction later in the session.

Meanwhile, the Nikkei 225 index traded 0.81 percent lower at 23,928 by 04:05 GMT, while at 04:00GMT, the FxWirePro's Hourly JPY Strength Index remained neutral at 60.22 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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