Japan yields struggle for direction ahead of key US data, JGB auction

TOKYO: Japanese government bond yields hovered in tight ranges on Thursday as traders awaited a barrage of U.S. data that will provide clues on the Federal Reserve’s rate-hike trajectory.

Investors were also cautious ahead of a 10-year JGB auction on Sept. 5 amid uncertain demand with yields stuck around 0.65%, more than a month since the Bank of Japan unexpectedly doubled the de-facto cap to 1% under its yield curve control (YCC) policy.

U.S. Treasury yields were also in tight ranges in Asian hours, with the 10-year almost flat around 4.11%.

With traders trying to judge the risks of further Fed tightening, inflation data later in the day and Friday’s monthly payroll print will be closely scrutinised.

The outlook for BOJ policy is also uncertain, with comments from policymakers revealing a split in views. Board member Toyoaki Nakamura said on Thursday that achievement of the 2% inflation target “isn’t in sight yet,” a day after colleague Naoki Tamura said it was “clearly in sight.”

The BOJ tweaked policy on July 28, sending the 10-year yield surging by as much as 16.5 basis points (bps) to a high of 0.605% on July 31, spurring the central bank to intervene via emergency bond buying. The BOJ conducted unscheduled purchases again later that week.

“We are at an awkward place regarding BOJ policy: We know they changed YCC, but we don’t know how much higher yields they are willing to tolerate,” said Ales Koutny, head of international rates at Vanguard.

“While the market will continue to push yields higher, it won’t be quick.”

The 10-year JGB yield edged down 0.5 bp to 0.645% on Thursday, keeping to the middle of its narrow range of the past two weeks between 0.625% and 0.675%, which was the highest level since January 2014.

Despite that milestone, the yield has only managed a 5 bps climb this month.

The 20-year yield ticked 0.5 bp higher to 1.385% on Thursday, while the 30-year yield was flat at 1.665%.

The five-year yield declined 1 bp to 0.22%.

The two-year yield slipped 0.5 bp to 0.025%, after hitting a 7-1/2-month peak on Wednesday, a day after an auction of the notes was met by poor demand.