Japanese government bonds faced a significant slump as the two-year yield surged to its highest point since 2008, following comments from Bank of Japan Governor Kazuo Ueda that put a potential rate hike in December on the radar. The two-year yield increased by 3 basis points, reaching 1.02%, with other maturities also experiencing notable rises. The yen showed signs of strength, climbing up to 0.5% against the dollar to settle at 155.4.
Market reactions intensified as traders in the swaps market began amplifying their expectations for a rate increase this month. Ueda stated that the central bank would weigh the advantages and disadvantages of raising the policy rate, emphasizing that the decision would be made appropriately. During a key speech, he noted an enhanced likelihood of realizing the economic outlook while assuring that conditions would remain accommodative even if the policy rate were raised.
Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corp, commented on the situation, noting that rising expectations for a BOJ rate hike are contributing to the yen’s appreciation and exerting upward pressure on the two-year JGB yield. He remarked that Ueda’s comments came off as slightly more hawkish than anticipated, suggesting a potential turning point for the yen.
Chidu Narayanan, chief APAC strategist at Wells Fargo in Singapore, remarked that Ueda’s latest statements represent a significant departure from his previous remarks after the last monetary policy meeting, resulting in increased yields across the bond curve. The yield on five-year notes spiked by 7 basis points to 1.38%, while the benchmark 10-year bond yield also climbed by 7 basis points to 1.87%, marking its highest level since 2008.
Currently, the swaps market is pricing in an over 80% likelihood of a rate hike during the BOJ’s next policy meeting on December 19, a stark increase from the 23% chance estimated just a week prior. The probability rises even further to over 94% for the January gathering.
Despite his cautious language, analysts suggest that Ueda’s remarks indicate a favorable stance towards a potential December move. At a recent press conference, he highlighted that currency fluctuations could contribute to inflation, prompting authorities to monitor the foreign exchange’s impact on price trends closely.
In a related development, Japan’s Ministry of Finance has announced plans to raise its issuance of short-term debt to fund Prime Minister Sanae Takaichi’s economic initiatives, increasing the supply of two- and five-year notes by ¥300 billion ($1.92 billion) each, along with a ¥6.3 trillion boost in Treasury bills. This heightened supply is expected to put pressure on shorter-end sovereign bonds.
Ryutaro Kimura, senior fixed-income strategist at AXA Investment Managers, noted the importance of cautiousness around bonds, particularly in light of anticipated inflation increases tied to the fiscal expansion under Takaichi’s administration and a looming deterioration in the supply-demand balance due to increased JGB issuance.
As speculation around a December hike heats up, the yen has experienced a nearly 5% decline against the dollar this quarter, making it the worst-performing currency among the Group-of-10 nations. This backdrop of persistent inflation above the Bank of Japan’s 2% target has intensified scrutiny on the central bank’s delayed response in raising rates. Investors are now closely watching an upcoming auction of 10-year bonds, with recent sales of two-year notes reflecting weak demand, underscoring cautious sentiment regarding the growing risks of a rate hike.
