Japan bonds tread water ahead of expected BOJ rate hike this week

Japanese government bonds (JGB) were little changed in quiet and largely directionless trading on Monday, ahead of an expected Bank of Japan interest rate hike later in the week.

The 10-year JGB yield lost 0.5 basis point (bp) to 1.945%, hovering not far from an 18-year high of 1.97% reached a week earlier. Yields move inversely to bond prices.

The two-year yield, which is more sensitive to monetary policy expectations, also fell 0.5 bp to 1.06%. It hit an 18-year high of 1.075% last Wednesday as bets for imminent monetary tightening built.


The BOJ's closely watched quarterly "tankan" survey, released on Monday, showed sentiment hitting a four-year high among big manufacturers, reinforcing expectations for the central bank to resume raising rates on Friday.

The tankan survey "supports a gradual, data-dependent normalisation" of monetary policy, which will underpin short-end JGB yields, said Shoki Omori, chief desk strategist at Mizuho Securities.

Traders currently lay about 82% odds for a quarter-point rate hike on Friday, according to LSEG data.

Meanwhile, the 30-year yield, which tends to reflect the fiscal outlook, added 2 bps to 3.37%, edging towards the all-time peak of 3.445% from earlier this month.

The yield has spiked amid worries about Japan's fiscal health as the new government prepares the biggest stimulus package since the pandemic.

Other tenors had yet to trade, as of 0410 GMT. (Reporting by Kevin Buckland; Editing by Subhranshu Sahu)