Global Market: Japanese bond yields climb as oil surge and fiscal concerns weigh on market

Japanese government bond (JGB) yields rose on Thursday as higher oil prices, triggered by escalating tensions between the United States and Iran, stoked inflation concerns and reinforced investor worries over Japan's fiscal outlook.

According to Reuters, crude oil prices extended gains for a fourth straight session after a fresh wave of U.S. strikes on Iranian military installations heightened fears of a broader conflict and potential supply disruptions through the Strait of Hormuz. The rise in energy prices added to expectations that inflationary pressures could remain elevated.

The benchmark 10-year Japanese government bond yield rose 0.5 basis point to 2.690%, with bond yields moving inversely to prices.


Longer-dated bonds came under heavier selling pressure. The 20-year JGB yield climbed 3 basis points to 3.565%, while the 30-year yield advanced 4.5 basis points to 3.800%. The yield on Japan's longest-dated 40-year government bond increased 6 basis points to 3.815%.

Inflation expectations strengthen
A Bank of Japan survey released on Thursday showed that more than 90% of Japanese households expect prices to rise over the next year, an increase from the previous survey conducted three months earlier. Reuters reported that the data pointed to broadening inflation expectations, potentially strengthening the case for further interest rate increases by the central bank.

Shorter-term government bond yields also moved higher. The two-year JGB yield, which is particularly sensitive to Bank of Japan policy expectations, edged up 0.5 basis point to 1.435%, while the five-year yield gained 1.5 basis points to 1.950%.

Fiscal concerns remain in focus
Investor sentiment also remained cautious amid ongoing concerns about Japan's fiscal position and the potential for increased government bond issuance.

Prime Minister Sanae Takaichi said on Wednesday that she did not see a connection between the government's draft economic blueprint and the recent sell-off in the Japanese government bond market.

Reuters reported that Keisuke Tsuruta, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities, said there remained a disconnect between the government's assessment of rising interest rates and the concerns reflected in financial markets. He noted that persistent worries over fiscal expansion and the prospect of greater JGB issuance were likely to keep investors cautious.

Global bond market backdrop
The move higher in Japanese yields came despite a decline in U.S. Treasury yields overnight. Reuters reported that Treasury yields eased after U.S. Producer Price Index data showed final demand prices fell 0.3% last month, coming in below economists' expectations and suggesting softer inflationary pressures in the United States.