Trading cautious ahead of Bank of Japan announcement

NEW YORK: US Treasury bond yields on Monday afternoon were back to where they started the day as investors traded cautiously in the lead up to Tuesday's interest-rate policy decision from the Bank of Japan.

Governor Haruhiko Kuroda's central bank said it bought 1.64 trillion yen ($14.77 billion) of Japanese government bonds on Monday to stem a spike in bond yields on the back of rising expectations the BOJ will adjust its ultra-loose monetary policy.

This is the largest amount of debt bought by the BOJ to manage its yield curve, and represents the third action in a week. Prior to the intervention, the 10-year Japanese government bond made its biggest upward move in more than a year.

"There's a lot to wait for this week. Nobody's making any big decisions ahead of the Bank of Japan or the Fed meetings," said Lou Brien, market strategist at DRW Trading in Chicago, Illinois.

Tightening Japanese monetary policy would drive up yields on the country's government bonds, which in turn would drive up Treasury yields. Treasuries have been an attractive alternative to JGBs for Japanese investors in search of yield.

If the yield on Japanese sovereign debt improves, Treasuries will need to offer a higher premium to compete. What is more, if low global bond yields have anchored Treasury yields, rising Japanese rates could steepen the yield curve.

The benchmark 10-year government bond hit 2.99 percent on Monday morning, its highest since June 13, before falling to 2.98 percent in the afternoon, less than two basis points above its open. The two-year note yield was little changed from Friday at 2.67 percent. The 30-year bond yield was up over a basis point from Friday to 3.11 percent.

The BOJ's meeting is the first in a series this week. The Federal Reserve will conclude its meeting on Wednesday, and the Bank of England will conclude on Thursday.

No change in interest rates is expected to come from the Federal Open Markets Committee meeting on Tuesday and Wednesday. Futures traders are pricing in just a 3 percent chance that the central bank will raise rates in August, according to the CME Group's FedWatch Tool. But the Fed's interpretation of the mixed second-quarter GDP growth data released on July 27 will be watched closely.

Market participants will be looking for adjustments to the language in Fed Chair Jerome Powell's policy statement. Minutes from the June FOMC meeting said "a number of (participants) noted that it might soon be appropriate to modify the language in the post-meeting statement indicating that 'the stance of monetary policy remains accommodative.'"