Greg Gibbs, Director at Amplifying Global FX Capital, notes that the global bond yields have continued to rise this week, notwithstanding a very dovish speech by the Fed’s Brainard on Monday seeming to put an end to thoughts that the Fed might be planning to hike next week (although the odds of a hike still stand at 22% probability).

Key Quotes

“It may be the case that rising bond yields reflect a higher risk that the BoJ implements operation reverse twist.

As we discussed in recent reports, the BoJ appears to want higher long-term yields to help revive profits for Japanese pension managers, life insurance companies, and banks all suffering from negative long-term yields, or very low ultra-long yields.   As such, the BoJ may be considering buying less long-term bonds.

The BoJ Governor and Deputy Governor have both said that they do not want to reduce the level of overall policy easing and thus may counter this reduction in longer-term bond purchases by lowering its NIRP.

This year, both a stronger JPY and aggressive bond buying by the BoJ have contributed to lower long-term bond yields in Japan, and this has spilled over to lower yields globally.

We may now be in the process of reversing this influence from Japan.  If the BoJ buys less long-term bonds and the JPY weakens, perhaps in response to a lower NIRP, both developments would tend to put upward pressure on Japanese and global yields.

Perversely, we may find that higher longer-term yields in Japan, spilling over to higher long-term yields abroad may encourage further gains in USD/JPY, producing a reinforcing rally in the USD/JPY and global bond yields.  A higher USD/JPY will be seen to increase inflation expectations in Japan and help lift Japanese longer-term yields and steepen its yield curve.

Two reports today by Bloomberg and the Asia Nikkei press appear claim inside knowledge of BoJ deliberations ahead of the 21 September policy meeting.  They tend to confirm the BoJ is heading this direction.”