Bond Market: May You Live in Interesting Times

- "Living in interesting times can be a blessing and a curse. Two recent events captured our attention: the potential for more Fed QE and the MOF intervention. In this piece, we explore the meaning of both these events, highlighting that we expect Fed action to be gradual and that a $100bn in asset purchases translates into about 25bp of easing. Turning to Japanese Treasury buying, we examine the three phases of purchases over the last year, noting the transitions in the various steps."
- "The first phase of buying lasted from March-April of this year and was evidenced by an acceleration of purchases of foreign bonds by Japanese investors as a ―we’ve seen this before‖ mentality took hold, encouraging US Fixed Income purchases. The second phase, which lasted from about May-Aug of 2010 was characterized by private intervention in the Yen, coupled with a desire to earn carry via USTs. The final phase, which we are entering now, consists of official buyers motivated by broader policy goals and not necessarily by short-term profit incentives. Although continued FX intervention appears more likely in this phase, we caution against investors getting too far ahead of themselves. Reserve accumulation by the Japanese authorities may not immediately translate into Treasury buying, though the end-of-month auctions and custody data may provide some signs."

Nomura Rates Radar 20100916

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