The Bank Of Japan Will Rock The Interest Rate Market, Maybe Tonight

January 22, 7:00 pm EST

We talked last week about the prospects of a government shutdown and the little-to-no impact it would likely have on markets.

Here we are, with a shutdown as we open the week, and stocks are on to new record highs.  Oil continues to trade at the highest levels of the past three years.  And benchmark global interest rates continue to tick higher.

As we look ahead for the week, fourth quarter earnings will start rolling in this week.  But the big events of the week will be the Bank of Japan and European Central Bank meetings. The Bank of Japan (the most important of the two) meets tonight.

Remember, we’ve talked about the disconnect we’ve had in government bond yields, relative to the recovering global economy and strong asset price growth (led by stocks).  And despite five Fed rate hikes, bond yields haven’t been tracking the moves made by the Fed either.  The U.S. 10-year government bond yield finished virtually unchanged for the year in 2017.

That’s because the monetary policy in Japan has been acting as an anchor to global interest rates.  Their policy of pegging their 10-year yield at zero, has created an open ended, unlimited QE program in Japan.  That means, as the forces on global interest rates pulls Japanese rates higher, away from zero, they will, and have been buying unlimited amounts of Japanese Government Bonds (JGBs) to force the yield back toward zero.  And they do it with freshly printed yen, which continues to prime the global economy with fresh liquidity.

So, as we’ve discussed, when the Bank of Japan finally signals a change to that policy, that’s when rates will finally move–and maybe very quickly.

If they choose, tonight, to signal an end of QE could be coming, even if it’s a year from now, the global interest rate picture will change immediately.  With that in mind, here’s a look at the U.S. ten year yields going in …

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