Wall Street wind shifts suddenly: The exuberance of the "Tachibana Nao Effect" in the high market is exaggerated, and strategist reversed the bet on the Japanese bond curve "further steepening".

After Naoto Kan's victory in the election, the yield curve of Japanese government bonds flattened sharply, causing the trading strategies once firmly believed in on Wall Street to loosen. Strategists believe that the market's interpretation of Kan's victory has been overplayed, and the current risk balance is shifting towards supporting a steeper yield curve. Citigroup and Deutsche Bank have exited trades betting on the short-term bond yields in Japan rising faster than long-term bond yields, joining the ranks of the French Industrial Bank, indicating that the current risk balance is now in favor of a steeper yield curve. This shift is attributed to the nomination of two new members of the Bank of Japan's board considered dovish on monetary policy by Naoto Kan, with reports indicating her concerns about further rate hikes. Strategists at French Industrial Bank, including Stephen Spratt, stated in their report, "We believe that the flattening of the Japanese government bond curve has gone too far, currently appearing too flat compared to our models. Given the lack of transparency in fiscal policy, upcoming long-term bond supply, low end of the 30-year bond yields range, and uncertainties surrounding the Bank of Japan's outlook, we prefer to tactically take the opposite operation." This effect has spread to the market. On Wednesday, as expectations for further rate hikes faded, short-term bonds rebounded, while concerns over the Bank of Japan potentially lagging behind the inflation curve under a looser policy stance caused long-term bond yields to rise, widening the spread between short and long ends. After cashing in on the flattening trend of about 25 basis points, Deutsche Bank strategist Francis Yared's team recommended exiting further positions betting on the flattening of the Japanese yield curve based on valuation factors and the nomination of dovish board members. Citigroup's Derek Ville and his colleagues also closed positions related to higher terminal rates at the Bank of Japan and more hawkish policy expectations positions originally based on the assumption of needing policy tightening to boost the yen but they still hold long positions in Japanese stocks. After Naoto Kan's victory, the yield curve in Japan flattened sharply as the market expected her to implement a fiscal agenda that is both expansionary and fiscally disciplined, reinforcing the rationale for policy normalization. The yield spread between 2-year and 30-year Japanese government bonds has narrowed from its January peak to around 210 basis points. However, signs suggest that Kan's policy preferences may be stronger than initially assumed by the market, potentially reigniting selling pressure and volatility in the bond market, reminiscent of the sharp sell-off last month. SMBC Nikko Securities strategist Ataru Okumura pointed out, "Overseas investors may have failed to accurately assess the re-inflationist stance of the two nominees for the Bank of Japan's policy board." He wrote, hence "the bond market may experience additional distortions towards steepening," with short-term yields declining while long-term yields rise, widening the spread between the two.