Feb 3. Bank of Japan the weak link of Central Banking?
–Yields have edged higher in front of today’s payroll data, with NFP expected +180k and hourly earnings +0.3. Yesterday’s net changes in rates were small, though I marked 5/30 at a slight new high of 116.3. Odds of a March hike have slipped from around 1 in 3 to 1 in 4, leaving the longer end as a more interesting trade. However, there was a buyer of 80k EDM7 9875/9862/9850p flies for 1.5 (settled there ref 9876.5).
–Implied vol remains soft. During the day March TY vol eased under 5%. TYH 124.25 straddle settled 1’14 or 5.0. Atm TY straddles with only ONE week to go (rather than THREE) trade around or just under 1 point. Also note that TYH options expire Feb 24, after Yellen semi-annual. Late in the day TYH 123.5p were 18 ask ref 124-12. Low of the contract (TYH) in Dec was 122-14, so just on that basis 3 to 1 risk/reward. Barring a geopolitical ftq event, growth and inflation prospects still argue for higher rates.
–BoJ is apparently having trouble pegging tens near zero, and, according to a Bloomberg item, bid today for unlimited quantities above the asking price. The central bank is being tested, and with Japan having been ground zero for zero rates, a run on the BoJ wil reverberate globally, should it occur.
https://www.bloomberg.com/news/articles/2017-02-03/bank-of-japan-offers-unlimited-bond-buying-to-reassert-control
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BOJ first disappoints with lower-than-expected debt purchases
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Central bank then offers to buy unlimited amount at fixed rate
