BOJ ‘Yield Curve Control’ Is Key To Unleashing Global Interest Rates

By Bryan Rich

July 30, 5:00 pm EST

The Nasdaq continued to slide today.  Stock indices tend to go down a lot faster than they go up.  The tech giant-driven Nasdaq was up over 15% year-to-date, just a few days ago, and has now given up more than 4% from the highs.

Not surprisingly, as people run for the exit doors on the big tech giants (taking profits), we’re seeing money rotate into the blue-chip value stocks.

The Dow and S&P 500 did much better than the Nasdaq today, which continues to slowly correct the big performance gap of the year (where the Nasdaq was up 15% at one point, while the DJIA was flat on the year).

Now, the biggest event of the week for markets may take place tonight.  We hear from the Bank of Japan on monetary policy.  We’ve discussed, many times, the role that Japan continues to play in our interest rate market.

Despite seven hikes by the Fed from the zero-interest-rate-era, our 10-year yield has barely budged. That’s, in large part, thanks to the Bank of Japan.  Japan’s policy on pegging its 10-year yield at ZERO has been the anchor on global interest rates.

As I’ve said, when they finally signal a change to that policy, that’s when (our) rates will finally move.  And that may be tonight.  There is speculation that they may adjust UP that target on their 10-year yield.  That would represent a dialing back of the BOJ’s QE program, which would signal the initial steps of exiting the crisis-era QE program.

What would that do?  If the BOJ does indeed adjust their “yield curve control” policy, it should send global interest rates higher.  That would put our ten-year yields back above 3%, which has been a level that has caused some uneasiness in markets.   This time around, a move back above three percent would reflect a steepening U.S. yield curve which may be perceived as a positive, especially for those that have been concerned about the potential of seeing an inverted yield curve (i.e. a recession indicator).

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