Closing Bell 28th July – Long Term Yields Rise on BOJ

The ASX gave back yesterdays gains as optimism over a peak in the hiking cycle and China stimulus were dampened by economists reviewing the recent central bank statements. The rise in the USD hurt commodity prices and iron ore took a tumble on the “imminent” stimulus in China that hasn’t arrived. In Asia, stocks fell, with Japan’s Nikkei logging steep losses after somewhat hawkish messaging from the Bank of Japan, while Chinese shares outperformed on hopes of more stimulus measures. The Bank of Japan’s ultra-low interest rate policy was one of the few remaining forces anchoring long-term bond rates. So long as the trillions of Japanese capital could earn only 0.5 per cent on 10-year bonds, they were forced to venture to bond markets such as the United States and Australia for yield enhancement. If the BoJ is prepared to loosen that peg – the obvious implication is for other long-term bond rates to rise. And if long-term bond rates increase, higher yields mean higher discount rates on risk assets such as equities, and lower prices. Oil was headed for the longest run of weekly gains in more than a year on an improving macroeconomic outlook and signs of a tighter market.