Japanese government bonds rally as Iran peace talks ease inflation fears

TOKYO: Japanese government bonds (JGBs) rallied on Monday, pushing yields further away from recent multi-decade highs, as signs of progress in resolving the Middle East conflict tamed inflation fears.

The benchmark 10-year JGB yield, which touched a 29-year high of 2.8% last week, slid 5 basis points to 2.710%.

The 30-year yield, which recently hit a record 4.2%, dropped 5.5 bps to 3.955%.

Yields move inversely to bond prices.

Japan’s dependence on imported energy has made its economy and inflation picture vulnerable to a surge in oil prices caused by the nearly three-month conflict.

JGBs came under added pressure last week after reports of a supplementary budget from Prime Minister Sanae Takaichi fuelled fresh fiscal concerns.

US President Donald Trump said over the weekend that Washington and Iran had “largely negotiated” a memorandum of understanding on a peace deal that would reopen the Strait of Hormuz shipping lane for petroleum. He later said he had told his representatives not to rush into any deal.

“Market participants are really unsure about Prime Minister Takaichi’s commitment to maintain fiscal discipline,” said Yunosuke Ikeda, the head of macro research at Nomura Securities.

“Many investors say it’s not the right timing to buy Japanese bonds, even though they believe rates are attractive and that they won’t climb much higher from here,” he added.

“Prime Minister Takaichi is well aware of the market’s concerns, and I think there will be positive surprises for investors in the next two months.”

The two-year yield, which is most sensitive to Bank of Japan policy rates, was not yet traded. The five-year JGB yield eased 3 bps to 1.970%.