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Gross calls bond bear market after Japan shock

Gross calls bond bear market after Japan shock

A surprise move by the Bank of Japan to reduce the amount of bonds it buys every month under its stimulus programme has sparked jitters in the fixed income market.

The Bank of Japan has reduced its  monthly purchases of 10- to 25-year government bonds and 25 to 45-year debt by 10 billion yen (£66 million) to 190 billion yen and 80 billion yen.

While that amounts to only a small change, the hint of a tapering to stimulus was enough to send bond prices lower, and yields higher.

The yield on US 10-year treasuries hit 2.57% overnight, its highest level in 10 months, prompting fixed income guru Bill Gross to declare a 'bond bear market'.

Analysts at Rabobank said that while the 10-year treasury yield had reached higher levels in March last year, the latest sell-off appeared significant.

'We might just have broken the long-run bull-market trade of the past few decades,' they said.

Michael Hewson, chief market analyst at CMC Markets UK, said the spike in bond yields reflected investors' surprise at the Bank of Japan's move.

'While some have speculated that yesterday's move was only a technical change, the move sent a ripple through the bond markets, pushing yields up on US treasuries and other bond markets as traders and investors re-adjusted their positions amidst a worry that they might be underestimating the pace at which central banks might look to withdraw stimulus in the coming months,' he said.

Jim Reid at Deutsche Bank said the market reaction was out of kilter with the Bank of Japan's move.

'While it seemed to come as a surprise, it's worth noting that the absolute purchase level was still within the Bank of Japan's target range of purchases,' he said. 'Imagine the scenario if something major happened!'

The spike in bond yields meanwhile boosted the share prices of banks, whose net interest margins receive a boost from higher borrowing rates.

Royal Bank of Scotland (RBS) rose 3.2% to 289.5p while HSBC (HSBA) was up 2.9% at 788.5p, helping drive the FTSE 100 to a new record high of 7,754.

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