Wednesday, September 21, 2016

BOJ Meeting Shows Stocks 'Want' To Go Up: Bullish

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*The BOJ announced a bold new plan to buy bonds to keep longer term yields at 0%.
*But the BOJ has run out of bonds to buy. We think the market knows that.
*That's why it seems the market is up because it "wanted" to go up anyway but not necessarily because of the BOJ.
*That is a good omen for US stocks as long as there is no US rate hike today.



The BOJ announced today that they will buy bonds with the target of keeping the 10 year yield at 0%. The BOJ commits to traders that they will be buyers. This sounds like a bold bullish move. The only problem is that there have been no sellers. The BOJ has already cornered the market. In essence based on not being able to buy as many bonds as they would have liked, their announcement is not as strong as the market reaction implies. That tells us the market "wanted to go up" anyway.
Yield Control: The BOJ Bond Buying Backstop
It's a nice move. It means that if bond investors want to sell the BOJ will be their buyers. The BOJ calls it yield control.
The plan works as long as there is inflation. If there is no inflation there is not much change to the BOJ's plan. Why? Because the main reason we'd see a holder wanting to sell their bonds is if they actually see inflation. Inflation typically will reduce bond values. Inflation reduces the value of future bond cash flows and so pressures bond prices. Inflation will cause bond holders to want to sell. Then in comes the BOJ's promise to buy those bonds to keep yields flat.
If there is no inflation the BOJ's plans are not much of a change and they go about trying to buy bonds that they've had trouble buying.
Japan has done a good job in cornering the market. Now there are many reports of a lack of sellers. Without inflation picking up causing bond holders to want to sell there was not much change in the BOJ action.
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