Govt bonds rally after BOJ vows to keep rates 'very low'

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The benchmark 10-year JGB yield fell 4 basis points to 0.060 percent.

SOVEREIGN bonds climbed across the world as the Bank of Japan (BOJ) pledged to keep its ultra-loose monetary policy in place and after underwhelming data from China.

"I think there is some nervousness ahead of tomorrow's results of the BoJ meeting", said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in NY.

TOKYO-The yield on the benchmark Japanese government bond posted its biggest percentage-point gain in two years, a day after Bank of Japan Gov. Haruhiko Kuroda said he would allow the yield to move in a wider band.

Yet, Kuroda also indicated that the BoJ will tolerate 10-year yields deviating as much as 0.2% from zero, compared to 0.1% now.

"Clearly the yen is struggling as a result of the Bank of Japan announcement overnight", said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

Japanese shares pared losses while the yen fell and yields on Japanese and US bonds declined on Tuesday after the BOJ decision, which stayed away from making drastic changes to its accommodative policy.

The BOJ added language to its bond buying program stating that "the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices".

The BOJ's policy changes, its first since 2016, reflected its forecast that it would take time for inflation to hit its 2 percent target. And it will continue to buy government bonds so that the outstanding balance will increase at an annual pace of about 80 trillion yen, or 700 billion dollars. Inflation remains less than halfway to the target after more than five years of extraordinary stimulus.

Analysts suggested that the latest policy tweaks clouded the longer term outlook for YCC.

The central bank has failed to break Japan's entrenched deflationary mindset despite years of heavy money printing, with stubbornly soft inflation sapping its ammunition and global trade woes clouding the outlook for an export-reliant economy.

The British pound slid below $1.31 as investors prepared for a Bank of England policy meeting this week at which markets are now pricing in a near-90 percent chance of a 25 basis points rate rise.

The euro has had problems of its own as the European Central Bank emphasized that rates would not be rising until the second half of next year. "The guidance is vague but gives some assurance that the current easing measures will continued at least into fiscal 2020, after checking the side effects of the planned consumption tax hike".

U.S. President Donald Trump pays attention to the stock market and if there were a significant sell-off on trade tariff headlines, Smith said, Trump would reverse positions.