The BoJ amended the rules for a fund supply market operation to use it as a new tool to prevent long term interest rates from rising too much. Under the amended rules, BoJ can offer funds upto 10 years against collateral to financial institutions for both fixed and variable rate loans.
What is Fund supply operations against pooled collateral?
Also known as open market operations, are a monetary policy tool used by central banks to control the money supply in an economy. In these operations, the central bank provides funds to commercial banks in exchange for a collateral, such as government bonds. The central bank can use these operations to increase or decrease the money supply in the economy, depending on its monetary policy goals.
Financial institutions can therefore buy say 10Y JGBs at 0.50% and use it as a collateral to borrow funds from BoJ. This would keep the yield on JGBs.
The BoJ simultaneously announced that it will offer 5 years loans under the fund supply operation with a duration of between Jan 24 2023 to Jan 24, 2028 on Jan 23, 2023.
Post the announcement, yields on the JGBs fell to as low as 36 bps from session highs of 0.51%.
Both USDJPY and 10Y JGBs have retraced with USDJPY trading at 130.25 ( High 131.57) and 10Y JGB yields at 0.425%.
BoJ policy has cross asset implications as was highlighted in the earlier article. Post the JGB announcement, US yields are also lower with 2Y down 4 bps and 10Y yield down 8 bps from session highs.
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