Lower interest rates, 50 yr treasuries, negative yield, BOOM...

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Current Foreign Ownership of U.S. Debt

In May 2019, China owned $1.11 trillion of U.S. debt. It's the largest foreign holder of U.S. Treasury securities. The second-largest holder is Japan at $1.1 trillion. Both Japan and China want to keep the value of the dollar higher than the value of their currencies.

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FLAT CURVE DILEMMA

Market expectations of imminent easing grew after the BOJ pledged in July to act pre-emptively “without hesitation” against risks that could knock the economy off the path toward achieving its 2% inflation target.

Waiting until the subsequent meeting on Oct. 30-31 will allow BOJ policymakers time to scrutinise the bank’s “tankan” business sentiment survey for clues on how much the pain Japan is suffering from the U.S.-China trade war. Policymakers can also see the initial consumer reaction to a sales tax hike that kicks off in October.

The BoJ is under no political pressure for imminent action.

Japanese Finance Minister Taro Aso said on Friday it was up to the BOJ to make monetary policy decisions, adding that Japan’s economic fundamentals remained solid.

Another problem the BOJ board could discuss next week is the persistent decline in long-term rates that threaten the bank’s policy aimed at controlling the yield curve.

The YCC policy was introduced partly to prevent the yield curve from flattening too much, as excessive declines in long- and super long yields will erode profit margins of financial institutions.

But downward pressure on global long-term rates pushed Japan’s 10-year yield to -0.295% last month, well below the -0.2% level seen by markets as the BOJ’s line in the sand. The 20-year yield briefly hit to 0.015%, barely staying above zero.


Sources have told Reuters the BOJ likely won’t tolerate the 10-year yield from sliding below -0.3%, as that could push the 20-year yield below zero and flatten the yield curve.

The BOJ may eventually need to coordinate with the Ministry of Finance, which issues public debt, to control the supply of bonds to steepen the yield curve, Daiwa’s Iwashita said.

“The BOJ may keep trying to prevent super-long yields from falling by reducing bond buying. But there’s a limit to what it can do alone,” she said.