Japan shorter-end yields fall as stronger yen dims rate hike bets

TOKYO: Yields on shorter-dated Japanese government bonds fell on Wednesday, as the stronger yen dimmed bets on the Bank of Japan’s aggressive rate hikes.

The two-year yield, most sensitive to the BOJ’s policy, fell 1 basis point to 1.835%.

The five-year yield fell 1.5 bps to 2.22%. Yields move inversely to bond prices.

The yield curve has been shifting over the last several sessions as the market assesses the impact of the yen’s sudden rise against the US dollar on the central bank’s policy.

“The markets are watching the yen’s move closely. If the currency keeps its momentum, inflation worries slow down so that traders want to buy longer ends,” said Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management.

“On the other hand, if the stronger yen reduces inflation worries, expectations for the BOJ’s faster rate hikes would weaken,” he said.

The JGBs saw a sharp rally last week as investors scooped up super-long maturities to unwind curve-steepening trades after the yen firmed up sharply.

A stronger yen eases inflationary pressure by lowering import costs.

The trades were mixed this week as some investors sold longer ends while weighing Japan’s aggressive spending.

“In the long run, the curve will be flattening, as I see few cues for the curve to steepen,” said Shinji Ebihara, head of rates strategy group at Tokio Marine Asset Management.

Market worries that the BOJ is falling behind the curve in dealing with inflation have receded amid US pressure, he said.

Robust sales of so-called retail JGBs may contain the increase in future bond issuance, which is also a positive cue for longer ends, he said.

The market for so-called retail JGBs is growing fast, and the government aims to increase uptake to diversify its investor base.

The 30-year yield inched up 0.5 bp to 3.965%.