ECB Governing Council member Olli Rehn viewed yield curve control for the region as “not sensible.” He noted that the eurozone has at least nineteen different yields curves that reflect vast economic and financial differences between the countries, and that YCC was not the best way to maintain favorable financing conditions. As part of its strategy review, Rehn said that the ECB is assessing how to define “favorable” financing conditions as well as the best to determine how to maintain those conditions. That said, reports have emerged that the ECB is engaged in YCC-lite, adjusting its asset purchases to maintain spreads for key bond markets at what it views as “appropriate” levels. Despite the dire outlook for the pandemic in Western countries, we think the bar is very high for most central banks to embark on new unconventional politics, be it yield curve control or negative rates. Fiscal policy is in the driver’s seat now.

On the virus front, Norway tightened mobility restrictions, France looks set to impose another lockdown, and the UK considering closing borders. In Norway, the government announced on Saturday that the “outbreak of the English virus mutation” requires that 10 municipalities (including Oslo) come under strict measures. In France, the government may announce a third lockdown on Wednesday, but no firm decision has yet been made. In the UK, aside from discussion about closing borders, the government changed the tone and now seems to be managing expectations lower by suggesting that the lockdown may last until the summer. Prime Minister Johnson said that his government will examine options for relaxing lockdown measures before the February 15 review but warned that he doesn’t want to risk another surge of infections by reopening too early.

Covid-19 Weekly Change

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German Data, 2016-2020

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Japan will sell JPY500 bln of 40-year JGBs tomorrow. The sale comes after reports suggest that the BOJ may allow the 10-year yield to trade in a wider band than the current 20 bp on either side of 0%.  It’s worth noting that the JGB curve has steepened a bit at the ultra-long end over the past month. However, increased debt issuance and a wider YCC range would likely lead to an even steeper yield curve and we are skeptical that the bank would allow this right now.  Indeed, a steeper curve would also tend to strengthen the yen and that is also undesirable for policymakers. While USD/JPY continues to hover around the 104 level, technical suggest the pair is setting up for another stab at the downside.

Polls suggest Suga’s government continues to lose support. Latest Asahi poll shows cabinet approval dropping to 33% from 39% last month and disapproval rising to 45% from 35% last month. The poll also showed that about 63% disapproved of the government’s handling of the pandemic, 80% thought the government was too slow to declare a state of emergency in response to the pandemic, and 54% thought that measures introduced under the emergency were insufficient. The poll was carried out over the weekend. We continue to believe that Prime Minister Suga will deliver another slug of fiscal stimulus near mid-year as he girds for elections this autumn, which will put further upward pressure on JGB yields.

The border dispute between India and China is flaring up again. Local media reported more clashes between the two sides and several injuries. While the news does re-open a risk for the region that has been dormant for several months, we don’t anticipate any severe escalation or market impact.