MBS Live Recap: Big Bad Day For Bonds (Not Because of Japan)

In certain circles, much was made of overnight news that the Bank of Japan would be buying fewer bonds.  That's about as far as most news stories delved into the topic, despite it being more complicated than bond-buying news in the US.  Let's break it down:

In the US, the Fed lays out a guaranteed amount of bond buying that will occur each month.  The Fed has also set in motion a guaranteed schedule of balance sheet reduction.  Specifically, they will reinvest bond trading proceeds only up to the extent those proceeds exceed gradually rising caps (currently rising at $6bln/month for Treasuries and $4bln/month for MBS).

The Bank of Japan (BOJ) lays out a more detailed menu of bond buying options but with more flexibility on the amount.  For instance, it's most recent schedule (feel free to dive in!) says it will buy "about 150-250" billion Yen in Japanese government bonds with maturities between 10 and 25 years, on 5 occasions throughout the month.  Today was the first of those 5 occasions and the BOJ bought 190 billion Yen.

You may be thinking "so what's the big deal?!  That's pretty close to the middle of the little range, right?"  

You are correct.  190 is indeed between 150-250.  The ostensible source of market panic is the fact that 190 is 10 billion Yen less than the last buying operation in late December (that's about $88 million USD by the way).

Long story short, it was the fact that today's announced bond buying amount was smaller than last time, even though it was well within the stated range.  Looking at overnight bond market momentum, it's quite clear that this wasn't a huge deal for Treasuries or other government bond markets no matter how many traders wish to make that case.  Was it a deal?  Sure.  It had an impact.  Was it the source of today's big selling spree?  Nope.

Today's big selling spree was simply what was on the table after the tablecloth was dramatically removed.  Today was the first trading day of 2018.  We've been talking for more than a month about "the 2nd week in January" being the first potential unveiling of 2018's first major dose of bond market momentum, and quite simply, that momentum stinks.  It was was a growing risk based on recent weakness, but it was confirmed today.  

You may also hear that oil prices played a role today.  I'm typically not a fan of that explanation, but in today's case, they tie in well to the rise in inflation expectations discussed in the Day Ahead.