Long-term JGB yields rise, shorter-term notes stay stable

Longer-term Japanese government bond (JGB) yields ticked up on Thursday, tracking higher US Treasury yields after economic data in the United States dashed hopes that the Federal Reserve may slow down the aggressive pace of its rate hikes.

The widening gap between interest rates in the US and Japan has put pressure on markets in the world’s third-largest economy this year, contributing to a sell-off in the yen currency.

Any slow down in Fed rate hikes, then, would likely take some pressure off Japanese assets. US economic data earlier this week hinted that the labour market and economy were slowing, but on Wednesday the ADP National Employment report and the non-manufacturing PMI both outstripped estimates, sapping optimism for a Fed pivot in the near term.

“Investors are cautious because they still don’t see the long-term market settling down,” said Shinsuke Kajita, chief strategist at Resona Holdings. The 5-year JGB traded flat at 0.035%, and the benchmark 10-year and two-year notes went untraded. Longer-term yields rose, with the 20-year JGB yield rising two basis points to 0.965%, the 30-year yield adding 3.5 basis points to 1.37%, and the 40-year yield rising 4 basis points to 1.55%.

Japan bond yields drop as BOJ quashes policy speculation

While the Bank of Japan keeps tight control on its 10-year benchmark, longer-term JGB yields have shown more volatility throughout 2022.

The 20-year yield is up 50 basis points since the start of the year.

The 10-year yield currently sits at 0.245%, right below the cap of 0.25% that the BOJ imposes through its yield curve control (YCC) policy. The yield hasn’t fallen below 0.2% since August, and the BOJ has engaged in buying operations to keep it below 0.25%.

The central bank said Thursday it would again offer to buy an unlimited amount of 10-year JGBs at the 0.25% yield from the next day.

JPMorgan analysts Ayako Fujita, Takafumi Yamawaki, and Benjamin Shatil wrote in a research note published on Thursday that they expect the BOJ to scale back its YCC policy from March of next year, with the most likely option seen to be a raising of the 0.25% cap.

“Based on the assumption that the BoJ raises its 10Y yield target to 25bp in March 2023, we currently expect the 5Y, 10Y and 20Y JGB yields to rise to around 0.1%, 0.4% and 1.2%, respectively,” the analysts wrote.