Japan bond yields rise on faster BOJ rate hike bets, inflation concerns

TOKYO: Japanese government bond (JGB) yields rose on Wednesday as traders increasingly expected the Bank of Japan to raise rates next month, while a rise in crude oil prices amid renewed uncertainty over the Middle East added to inflation concerns.

Markets were also focused on the US Consumer Price Index, due later on Wednesday, for clues on the direction of Federal Reserve interest rates.

The benchmark 10-year JGB yield rose 4.5 basis points (bps) to 2.850%. Yields move inversely to bond prices.

The 5-year yield rose 2.5 bps to 2.110%, a record high.

The 2-year yield, the most sensitive to Bank of Japan policy rates, increased 3.5 bps to 1.645%, the highest since May 1995.

Traders are increasingly pricing in the possibility of another BOJ rate hike in September, earlier than the previously expected December timing, which would have marked six months since the last rate increase in June.

The shift follows recent Japan-US joint currency intervention to support the yen and what was seen as a hawkish tone in the BOJ’s July meeting summary of opinions.

The summary of opinions released on Monday “gave an impression that policymakers are positive about deciding on a rate hike at the September meeting,” Barclays chief Japan economist Naohiko Baba said in a note.

Markets were pricing in a 78% chance of a September move as of midday Tuesday, up from 66% on Monday afternoon, according to Tokyo Tanshi data.

The 20-year JGB yield climbed 3 bps to 3.715%.

The 30-year yield added 4 bps to 3.990%. Oil prices ticked higher on Wednesday after Iran’s top security official said that the vital Strait of Hormuz shipping route will remain closed unless the United States accepts Iran’s conditions to end the war and after the US and Yemen’s Iran-aligned Houthis reported separate attacks on shipping.

Brent crude futures rose 0.74% to $89.57 a barrel, while US crude was up 0.76% to $83.84.