BoJ's rate strategy

JGB markets remained at high levels this week in a continuation of the previous week's pattern. The 20y auction on Tuesday enjoyed solid demand despite the low absolute level of yields, but the superlong sector underperformed under-10y sectors somewhat ahead of the40y auction on 27 October.

Risk assets continue to turn around globally. Fears of weaker-than-expected global growth emerged in July with a massive impact, one that extended beyond the emerging markets and resource-producing countries at the root of the weakness and spilled over into developed economy equities at the end of August. 

However, with share prices having already fallen sharply, it became difficult to expect further downside as long as the markets faced only a deteriorating economic outlook rather than systemic risk. The tail risk of a financial crisis stemming from resource trading companies failed to materialize at the end of September, halting the decline in share prices. In October, the focus of the global markets has shifted from concerns about growth to potential policy responses (US rate hike delays, further BoJ an ECB easing). 

The markets now appear more sensitive to the remarks of central bankers than individual data points. The usual inverse correlation between equities and bonds is expected to remain weak, says Barclays.