Japan bond yield curve twist-steepens ahead of Fed decision

TOKYO: Japan’s government bond yields moved in opposite directions on Wednesday, as fiscal concerns and higher oil prices fuelled inflation worries ahead of the US Federal Reserve’s policy decision.

The yield curve, which tracks borrowing costs across different bond maturities, twist-steepened as yields on five- and 10-year bonds declined while those on superlong maturities rose.

The benchmark 10-year JGB yield fell 1 basis point to 3.020%, after hitting a 30-year high in the previous session.

The five-year yield dropped 1.5 basis points to 2.295%.

Bond yields move inversely to prices.

The 20-year JGB yield climbed 2 bps to 3.905%, after touching a three-decade high of 3.925%.

The 30-year yield added 4 bps to 4.190% while the yield on the 40-year JGB, Japan’s longest tenor, rose 1 bp to 4.22%.

Bloomberg News reported on Tuesday that Tokyo was considering defence spending worth 3.5% of gross domestic product in the medium term.

The report “likely had a significant impact” as the market appeared to have taken it as raising the prospect of fiscal expansion and, in turn, higher JGB yields, said Hiroshi Namioka, chief strategist at T&D Asset Management.

“The yen has also started to weaken again, which is another negative from a fiscal perspective,” he added. Oil prices hovered in the mid-$100-a-barrel range after shipping industry sources said crude loadings at Saudi Arabia’s Red Sea export hub of Yanbu had been suspended and Riyadh had cancelled some cargo deliveries to European customers.

The Fed will announce its policy decision at 2 p.m. EDT (1800 GMT) on Wednesday following the end of a two-day meeting.

Financial markets are betting heavily that the bank will lift its benchmark rate a quarter of a percentage point, to a 3.75%-4.00% range, and signal further tightening ahead.

At home, the Yomiuri newspaper reported that Prime Minister Sanae Takaichi is likely to retain Minoru Kiuchi, an advocate of expansionary fiscal and monetary policy, as minister in charge of economic revitalisation in a cabinet reshuffle scheduled for Thursday.

“In the bond market, many had viewed the possible replacement of Kiuchi as a buying factor, so some unwinding of those expectations could emerge today,” said Keisuke Tsuruta, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities.