Japan's government bond yields fall as lower oil prices ease inflation fears

TOKYO: Japanese government bond (JGB) yields fell on Wednesday, tracking U.S. Treasury yields lower overnight, as the decline in oil prices eased fears of rising inflation, and the yields retreated from the previous session’s sharp rise driven by a weak auction outcome.

The benchmark 10-year JGB yield fell 3.5 basis points (bps) to 2.81%. The five-year yield fell 3 bps to 2.05%. Yields move inversely to bond prices.

Interest rate-sensitive two-year U.S. Treasury yields fell to a two-week low on Tuesday as oil prices tumbled on hopes for a deal to end the Iran war, prompting traders to reprice for lower odds of a Federal Reserve interest rate hike in September.

“Investors bought back bonds after the yields rose sharply in the previous session after a weak 10-year bond auction,” said Eiichiro Miura, senior general manager of investments at Nissay Asset Management.

The two-year yield, inched down 0.5 bp to 1.56% after rising to 1.57% in early trade, matching the highest level in May 1995 marked in the previous session.

JGB yields rise as inflation, fiscal concerns mount

The two-year bond yield, which reflects the Bank of Japan’s policy, is under upward pressure because the market expects an interest rate hike at a faster pace after last week’s joint intervention by Washington and Tokyo to buy the Japanese yen, Miura said.

“The intervention to shore up the yen raised bets for faster-paced interest rate hikes. The market expects the next hike as early as September, and there could be another one in December,” Miura said.

Swap rates indicate an 86.6% chance for the BOJ to raise its policy rate by 25 basis points to 1% in October.

The 20-year JGB yield fell 2 bps to 3.685%. The 30-year yield slipped 2 bps to 3.97%. The yield on the 40-year JGB fell 1.5 bps to 4.01%.