Bond Report: Treasury yields edge higher as Bank of Japan tweaks bond buying

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Treasury yields rose on Monday as the Bank of Japan said it could shrink the amount of bonds it would buy next month.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, +0.05% rose 1.2 basis points to 1.690%, while the 30-year bond yield TMUBMUSD30Y, +0.03% was up 1.6 basis points to 2.143%. The 2-year note yield TMUBMUSD02Y, -1.45% ticked higher by 2 basis points to 1.628%

What’s driving Treasurys?

The Bank of Japan published its October schedule for its bond-buying operations, indicating it could cut the size of its purchases across a range of maturities compared with September. The move is potentially part of the central bank’s efforts to steepen the slope of the yield curve, widening the spread between short-term and longer-term rates.

As part of the central bank’s signature yield-curve control policy, the BOJ adjusts its bond buying to keep the 10-year yield at around 0%, but this year’s global bond rally has pushed the benchmark rate well below its target. By keeping longer-term yields higher than their short-term peers, the central bank aims to ease pressures on the financial sector, as its margins come under pressure from the BOJ’s policy of ultralow interest rates.

The 30-year Japanese government bond yield TMBMKJP-30Y, +10.37%  surged 10.9 basis points to 0.430%.

Elsewhere, European Central Bank President Mario Draghi advocated for additional fiscal policy, in an interview with the Financial Times.

In economic data, eurozone employment rate fell to 7.4% in August from 7.5% in July, marking its lowest level since May 2008.

As for the U.S., the Chicago purchasing managers index for September fell for the third time in four months to 47.1, signaling ongoing struggles for U.S. manufacturers. Any reading above 50 is considered an expansion of activity.

What did market participants’ say?

“This is a big deal that the BOJ is actually now rooting for higher longer term rates. Imagine that, but the pain in their banking system has finally gotten them to wake up,” wrote Peter Boockvar, chief investment officer of Bleakley Advisory Group.

What else is on investors’ radar?

The end of the third-quarter will put the overnight repo market in the spotlight, where banks and hedge funds can borrow funds for a single day in return for collateral. The Federal Reserve has carried out regular repurchasing agreements to prevent turmoil from returning to short-term lending markets.

Funding costs can spike at the end of the quarter and the year as banks will temporarily shrink their balance sheets to pass regulatory checks, making them less willing to lend funds on an overnight basis.