It's 2am in Japan and Nikkei has decided – right as the 30Y Treasury auction hits – to unleash a spurious headline – BOJ TO EXPLORE DELVING DEEPER INTO NEGATIVE RATES, with Bloomberg providing the following detail:
- Sept. 20-21 review expected to conclude that benefits of -0.1% deposit rate announced Jan. outweighed side effects; BOJ Gov. Kuroda and his deputies are unanimous on this point
- Some observers had expected negative rates to be scrapped in policy review
- Further negative rates will require careful consideration: “It’s not as though we can keep lowering rates forever,” report quotes unidentified BOJ official as saying
- Board to discuss trimming purchases of bonds longer than 25 years to boost yields
- Purchases of shorter-term bonds could be increased to keep overall purchases at current level
- To retain 2% price growth target, while considering abandoning two-year time frame
- Stronger forward guidance may be discussed to demonstrate commitment to easing
In other words, a Reverse Operation Twist. There is just one issue, as regular readers will know, all of this is 'old news'… but don't tell the algos. As a reminder, another rate cut is precisely what we said would happen last week when we explained how the BOJ would try to force a reverse "Operation Twist." Recall:
Japan’s central bank in coming weeks will modify its stimulus program to alleviate risks from ultra-low long-term yields, by pursuing a reverse "Operation Twist", where the central bank sell long-end bonds while buying the short-end…. To avoid market fears that the central bank is seeking an outright tightening of monetary conditions, which a "reverse Twist" would suggest, the BOJ may cut short rates further from the current -0.20%. A cut in the already-negative benchmark rate, levied on a portion of banks’ reserves parked at the BOJ, which would also steepen the yield curve, could show the BOJ is still implementing unvarnished stimulus.
Confirming that all this is, is an attempt to steepen the yield curve is the news that:
- BOJ TO DISCUSS TRIMMING PURCHASES OF 25Y JGBS, NIKKEI SAYS
Why? So the market sells the long ends and rushes into the short end. Incidentally, what this means is that the curve steepening in Japan will only get more acute, in line with what the BOJ believes it wants to accomplish, but in the process it will only accelerate the JGB selloff, as all those trillions in long dated bonds will have to be sold, in what may soon be an avalanche, ultimately leading to a parallel of the 2003 VaR shock we previewed last week.
Of course, USD strength after a weak auction is also helping but the timing is simply too coincidental not to be an attempt at manipulation:
For now it's not helping stocks too much:
But that didn't last long – stocks algos quickly jumped on the USDJPY spike on old news:
Once the algos realize that all the BOJ's act of desperation will do, is destabilize the JGB bond market even more, we expect an appropriate (VaR) shocked reaction.