Indian bonds trade mixed after BoJ modifies policy framework; investors eye FOMC meeting

The Indian bonds traded mixed Wednesday after the Bank of Japan in its monetary policy decision kept its interest rates unchanged at -0.10 percent and added to continue its asset purchase until inflation stabilises around 2 percent target.

Also, markets now await the Federal Open Market Committee monetary policy meeting, scheduled to be held on Wednesday.

The yield on the benchmark 10-year bonds, which moves inversely to its price, fell nearly 2 basis points to 7.048 percent, the super-long 30-year Treasury yield dipped 1-1/2 basis points to 7.262 percent and the short-term 2-year note yield jumped 2 basis points to 6.729 percent by 07:00 GMT.

At the two-day rate review that ended on Wednesday, the BOJ maintained the 0.1 percent negative interest rate it applies to some of the excess reserves that financial institutions park with the central bank. But it abandoned its base money target and instead adopted "yield curve control" under which it will buy long-term government bonds to keep 10-year bond yields at current levels around zero percent. The BOJ said it would continue to buy long-term government bonds at a pace so that ensures its holdings increase by 80 trillion yen ($781 billion) per year, Reuters reported.

According to Reuters, the Bank of Japan added a long-term interest rate target to its massive asset-buying program on Wednesday, overhauling its policy framework and recommitting to reaching its 2 percent inflation target as quickly as possible. The central bank also said it will allow inflation to overshoot its target by maintaining an ultra-loose policy - beefing up its previous commitment to keep policy easy until the target was reached and kept in a stable manner.

The United States Federal Reserve in its meeting scheduled on September 20-21 and it is widely expected to leave its interest rates on hold, despite concerns that the strength of the world’s largest economy warrants a rise in borrowing costs. The September FOMC statement as a potential rude awakening for markets who have come to interpret 'data dependence' to mean everything has to be perfect for the FOMC to act.

Given the continued support from labour markets and gradual improvement in pricing measures, coupled with a closing window ahead of the November elections, September sets itself up as quite possibly the best time to act (particularly given that supportive data is not something that can be a guarantee come the December meeting).

Meanwhile, the Sensex rose 0.49 percent or 139.20 points to 28,662.40 and Nifty-50 futures traded 0.51 percent higher or 45.75 points at 8,848 by 07:10 GMT.