Global Market: Japanese bond yields rise as BOJ rate hike bets keep markets on edge

Japan’s government bond yields rose on Monday, recovering from sharp declines in the previous sessions, as investors focused on an upcoming five-year bond auction and reassessed the outlook for Bank of Japan interest-rate hikes.

The 20-year JGB yield climbed 3.5 basis points to 3.74%, while the 30-year yield rose 4.5 basis points to 4.010%.

The benchmark 10-year JGB yield increased 2.5 basis points to 2.93%. Bond yields move inversely to prices.

Five-year auction in focus

Market participants were cautious ahead of the five-year JGB auction scheduled for the next session, with demand at the sale expected to provide clues about investor appetite for Japanese government debt.

According to Reuters, investors were also assessing the possibility of higher U.S. Treasury yields in the coming week amid several large corporate bond sales, which could influence global fixed-income markets and Japanese bond pricing.

The two-year JGB yield rose 1.5 basis points to 1.84%, while the five-year yield gained 2 basis points to 2.245%.

Super-long yields rebound after sharp decline

Super-long JGB yields had fallen sharply last week as investors unwound curve-steepening trades. The decline came as inflation concerns eased following a strengthening yen, while expectations for further monetary tightening by the Bank of Japan increased.

Reuters reported that markets are gaining greater clarity on the potential path of future BOJ rate increases, helping drive a reassessment of positions across the Japanese government bond curve.

The one-month forward overnight swap rate starting in two years stood at around 2.3% on Monday, after reaching a record high of 2.52% last week.

BOJ rate hike expectations remain strong

Money markets are pricing in a 25-basis-point increase in the BOJ's policy rate to 1.25% at its meeting next week, according to Tokyo Tanshi. Markets are also fully pricing in another increase to 1.5% by the central bank's January meeting.

Firm expectations for higher policy rates have kept pressure on shorter-dated JGB yields, while recent moves in the yen and changing inflation expectations have contributed to volatility in longer-maturity bonds.

The upcoming five-year auction will therefore be closely watched for signs of demand as investors adjust portfolios to a potentially higher Japanese interest-rate environment.

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