JGBs rally as demand rises at auction, markets eye rate-hike odds

TOKYO: Japanese government bonds (JGBs) rallied on Tuesday as demand increased at a sale of two-year securities and markets assessed the central bank’s response to inflationary pressures from the Middle East crisis.

The benchmark 10-year JGB yield fell 1.5 basis points (bps) to 2.340% after reaching as high as 2.390% on Monday, a level not seen since February 1999.

The five-year yield fell 1 bp to 1.770%. Yields move inversely to bond prices.

The two-year yield, the one most sensitive to Bank of Japan policy rates, was flat at 1.355% after last week reaching 1.38%, the highest since May 1995.

An auction of about 2.8 trillion yen ($17.53 billion) of the securities had a bid-to-cover ratio, a measure of demand, of 3.54, an increase from 3.32 at the previous sale.

Core consumer prices in Tokyo rose 1.7% in March from a year earlier, data showed, staying below the BOJ’s 2% target for a second straight month as the effect of fuel subsidies offset rising costs from a weak yen.

“Yields on US and European bonds have been falling in defiance of rising oil prices, suggesting that a recession in the West is now being viewed as a realistic risk amid the prolonged conflict,” said Ataru Okumura, a senior strategist at SMBC Nikko Securities.

“Since we cannot be certain that the Bank of Japan will proceed with rate hikes at a rapid pace, medium-term JGBs are likely to enter a period of consolidation for the time being.”

The 20-year JGB yield slid 5 bps to 3.255%.

The 30-year yield sank 9 bps to 3.7%, while the yield on the 40-year bond, Japan’s longest tenor, fell 9 bps to 3.94%.

Despite the easing of inflation in Tokyo, the central bank will still likely go ahead with a rate hike in April, according to Barclays analysts Naohiko Baba and Takashi Onoda.

“The BOJ remains focused on the impact of higher crude oil prices on long-term inflation expectations, which are still on a gradual upward trend,” they said in a report.