BOND REPORT: Treasury Yields Retreat After Bank Of Japan Quashes Talk Of Early 'exit' Of QE

U.S. Treasurys saw some buying on Tuesday, pushing yields lower, after the Bank of Japan tamped down on speculation that the central bank may follow the European Central Bank and the Federal Reserve by adopting a more hawkish monetary policy.

President Donald Trump also signed legislation to end a partial shutdown of the government.

What are Treasury yields doing?

The yield for the 10-year benchmark Treasury note was down 3.9 basis points to 2.624%, the 2-year note yield was down 1.6 basis point to 2.057%, on track to snap a 14-day streak of yield gains. The 30-year bond yield gave up 3 basis points, retreating from its highest close in three months, to 2.897%.

Bond prices and yields move in the opposite directions.

What are driving bond markets?

(http://www.marketwatch.com/story/shutdown-averted-for-now-as-congress-passes-temporary-budget-measure-2018-01-23)As expected, the BOJ voted 8-1 to maintain its target for 10-year Japanese government bond yields at around zero and its short-term deposit rate at minus 0.1%. BOJ Gov. Kuroda also signaled that sluggish inflation in Japan was flat rather than "weakening". which helped the yen strengthen against the dollar to Yen110.38. Still, the Japanese central bank said it was still too early to discuss scaling back its easy-money policy stance, as investors had been speculating.

Market participants have blamed the profligate use of quantitative easing for depressing interest rates all over the world, and have kept a lid on long-dated Treasury yields. Improving global growth (http://www.marketwatch.com/story/us-tax-overhaul-will-boost-global-growth-imf-says-2018-01-22) has stoked expectations for the European Central bank and the BOJ to end their monthly asset purchase, despite their officials insisting a policy shift is unlikely to happen anytime soon.

Congress passed a three-week funding measure (http://www.marketwatch.com/story/shutdown-averted-for-now-as-congress-passes-temporary-budget-measure-2018-01-23) halting a three-day shutdown. The agreement keeps the government running up to Feb. 8, though underlying disagreements between the Republicans and the Democrats on immigration and other topics remain.

The White House on Thursday announced tariffs (http://www.marketwatch.com/story/us-targets-china-with-steep-tariffs-on-solar-panels-washing-machines-2018-01-22) on imports of washing machines and solar panels, aimed mainly at Asian producers, which could stoke further fears of a trade conflict.

Looking ahead, bond traders will focus on the ECB's policy update on Thursday, which could offer further signs about the central bank's accommodative stance.

See: 5 key question for the ECB as hawkish noises start to emerge (http://www.marketwatch.com/story/5-key-question-for-the-ecb-as-hawkish-noises-start-to-emerge-2018-01-23)

What did market participants say?

"The Bank of Japan's stalwart defense of easy monetary policy this morning did light a modest bond rally around the world. Unlike most economists who see sufficient global warming to allow all banks to move toward more normal conditions, the BOJ said it isn't even yet in position to consider such a change," said Jim Vogel, interest-rate strategist for FTN Financial, in a note.

"It is a very unique situation that we're going to see [global central banks'] balance sheet unwind eventually as global growth continues and central banks come under pressure to remove their accommodative monetary policy," said Geoff Caan, a money manager at Sun Life Investment Management.

What else is on investors' radar?

Chicago Fed President Charles Evans will speak at 6:30 p.m. Eastern. But his comments will not touch on monetary policy, as the Fed is entering its blackout period ahead of next week's meeting of the Fed Open Market Committee, its rate-setting body.

What are other markets doing?

The German 10-year government bond yield was down 0.4 basis point to 0.498%, after falling to an intraday low of 0.477%, according to Tradeweb. The Japanese 10-year bond yield fell 0.6 basis point to 0.073%.

(END) Dow Jones Newswires

January 23, 2018 14:41 ET (19:41 GMT)