TOKYO: Japan’s two-year government bonds rose on Tuesday after a strong auction outcome, as the market viewed the current yield level as attractive given the uncertainties regarding the Bank of Japan’s rate hike path.
The two-year JGB yield fell 2 basis points (bps) to 0.82%.
Yields move inversely to bond prices.
The auction for two-year bonds saw a strong outcome, with the lowest accepted price being higher than market expectations.
“With uncertainties around Japan’s politics, there is a possibility that the BOJ may not raise its interest rates to 0.75% within this year,” said Ryoma Nagatomo, a senior fund manager at Norinchukin Zenkyoren Asset Management.
“Current level of the two-year bond yield factored in such expectations.”
Japan’s shorter-dated bond yields jumped last week on bets that the central bank may resume interest rate hikes by year-end as Japan struck a trade deal with the U.S. that imposes a 15% tariff on Japan’s exports.
The BOJ will hold its next policy meeting this week, though the market expects any rate increase will come in October or later.
“The October meeting might be the only chance for the BOJ to raise rates, because Japan’s inflation may slow toward the end of the year,” said Takashi Fujiwara, chief fund manager at Resona Asset Management’s fixed income investment division.
The BOJ may not be able to raise rates until next year when it confirms the trend of wages if it misses the October rate hike, he said.
The five-year yield fell 1 bp to 1.105%. The 10-year JGB yield fell 1 bp to 1.555%.
Swap rates indicate a 75% chance for the BOJ to raise rates by 25 bps to 0.75% at its December policy meeting.
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