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TREASURIES-Yields jump as BoJ surprises with yield curve control shift

(Adds quotes, details, updates prices) By Karen Brettell NEW YORK, Dec 20 (Reuters) – U.S. Treasury yields rose on Tuesday after the Bank of Japan surprised markets by widening the band of its yield curve control, sparking a global sell-off in bonds. In a move explained as seeking to breathe life back into a dormant bond market, the BoJ decided to allow the 10-year bond yield to move 50 basis points either side of its 0% target, wider than the previous 25 basis point band. “The surprising thing was that they did it so soon. There was pretty much no one that anticipated they would widen the bands of their yield curve control before the middle part of next year,” said Benjamin Jeffery, an interest rate strategist at BMO Capital Markets in New York. Investors had expected no changes to the BoJ’s yield curve control (YCC) until Governor Haruhiko Kuroda steps down in April. The central bank kept its yield target unchanged and said it would sharply increase bond buying, a sign the move was a fine-tuning of existing ultra-loose monetary policy rather than a withdrawal of stimulus. Benchmark 10-year note yields rose 10 basis points to 3.684%, while two-year yields were little changed on the day at 4.266%. The yield curve between two-year and 10-year notes scaled back its inversion to 58 basis points, but remained at deeply negative levels, indicating concerns about an impending recession. The move could make U.S. government bonds and other foreign debt even less attractive to Japanese investors that hedge the bonds in the foreign exchange market, according to analysts at Wells Fargo. “Japanese investors have been net sellers of foreign bonds throughout 2022, and today’s BoJ decision should only reinforce that bias,” analysts Erik Nelson and Jack Boswell said in a report. This is because the Bank of Japan has not changed its short-term policy rate, which determines the three-month FX hedging costs, but has given longer-dated yields more room to rise, which “effectively makes foreign bonds even less attractive relative to JGBs than before,” the analysts said. Volumes in Treasuries are expected to decline this week before the Christmas and New Year holidays, with many traders taking vacations or reluctant to take risks after closing their books for the year. This week’s U.S. economic focus will be personal consumption expenditures (PCE) data for November due on Friday, which will be watched for further clues about inflation. Investors are trying to gauge how high the Federal Reserve will raise rates as it battles persistent inflation. Fed Chair Jerome Powell last week said the U.S. central bank would deliver more interest rate hikes next year even as the economy slips toward a possible recession, arguing that the cost would be higher if the Fed does not get a firmer grip on inflation. Data on Tuesday showed U.S. single-family homebuilding tumbled to a 2-1/2-year low in November and permits for future construction plunged as higher mortgage rates continued to depress housing market activity. December 20 Tuesday 3:00PM New York / 2000 GMT Price Current Net Yield % Change (bps) Three-month bills 4.25 4.3563 -0.026 Six-month bills 4.5375 4.7085 -0.010 Two-year note 100-110/256 4.2658 0.004 Three-year note 99-240/256 4.0222 0.025 Five-year note 100-104/256 3.7837 0.073 Seven-year note 100-164/256 3.769 0.092 10-year note 103-160/256 3.6843 0.101 20-year bond 100-228/256 3.9348 0.117 30-year bond 104-188/256 3.7356 0.113 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 30.25 2.00 spread U.S. 3-year dollar swap 13.25 1.00 spread U.S. 5-year dollar swap 3.75 -0.75 spread U.S. 10-year dollar swap -5.50 -2.25 spread U.S. 30-year dollar swap -44.50 -3.50 spread (Reporting by Karen Brettell; Editing by Andrea Ricci and Richard Chang)


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