Risk sentiment sharply deteriorated in Thursday’s afternoon session, and volatility made a strong comeback in the market.
The VIX, the fear index, surged over 10% amid growing speculation the Bank of Japan (BoJ) might consider removing the yield curve control, which limits the 10-year bond yield to 0.5%. The BoJ’s policy meeting is expected at 5 p.m. ET.
Market Reactions: Stocks Fall, Bond Yields Rise And Metals Dip
Major U.S. stock indices all turned red, and the Japanese yen rallied by 1% against the dollar. The USD/JPY pair dipped to 139.
The Dow Jones Index, as tracked by the SPDR Dow Jones Industrial Average ETF (NYSE:DIA) broke its record streak of 13 consecutive green sessions, last seen in January 1987 in the post-war period, losing 0.7% for the session.
The S&P 500 and the Nasdaq 100 declined by 0.6% and 0.3%, respectively, despite overall better-than-expected corporate earnings. Small caps suffered the most, with the iShares Russell 2000 ETF (NYSE:IWM) falling 1.3%.
Financial stocks experienced a decline following the announcement of new rules by U.S. regulators, with the Financial Select Sector SPDR Fund (NYSE:XLF) down 1.3% for the day. The regulations mandate that banks holding over $100 billion in assets must increase their capital requirements by a total of 16%.
On the bond market, yields sharply rose on longer maturities, with the 10-year Treasury yield jumping 13 basis points to 4%. The 30-year Treasury reached a yield of 4.05%, up by 12 basis points during the session.
The iShares 20+ Year Treasury Bond ETF (NYSE:TLT) declined by 2%, marking the third-worst day of 2023 so far.
Among commodities, gold slid 1.3% below $1,950/oz, erasing all post-Fed meeting gains, while silver tumbled 3.3% to $24.2/oz.
Crude oil remained stable, with WTI grade gaining 1% during the session, flirting with $80 per barrel.
Why Is The Market Reacting To Bank of Japan’s Move?
Zenger News’s Take: The rise in Japanese bond yields could potentially drain a significant amount of liquidity invested in risk assets globally, redirecting it toward safer investments like bonds.
The BoJ was the last bastion of a world still grappling with negative interest rates, and its potential shift could mark the end of an era.
Japan holds the largest amount of U.S. Treasuries, with $1.1 trillion in holdings according to the latest data from March 2023, released by the Department of the Treasury and Federal Reserve Board.
Even a small change in Japanese interest rates and yields can move a considerable amount of money in financial markets.
Produced in association with Benzinga