Japanese government bond (JGB) yields climbed to fresh multi-year highs on Monday as markets increased their bets that the Bank of Japan will raise interest rates at its meeting next week.
Traders are now assigning roughly 80% odds to a 25-basis-point hike on December 19, reflecting growing confidence that the central bank is preparing to resume tightening.
Expectations picked up after BOJ Governor Kazuo Ueda said at the start of the month that policymakers would “consider the pros and cons” of tightening policy at its upcoming meeting. It was reported that a December rate hike is likely, with the government expected to tolerate such a move, Reuters said in a news report.
Here are some key yield moves
— The yield on the benchmark 10-year JGB rose 0.5 basis point to 1.955%, its highest since July 2007.
— The two-year yield also gained 0.5 basis point to 1.055%, the highest since July 2007
— While, the five-year yield advanced 0.5 basis point to touch 1.44% for the first time since June 2008.
— Longer-dated yields also saw sharp moves, as the 20-year JGB yield climbed 2.5 bps to 2.945%, matching its June 1999 peak.
— The 30-year yield also increased by 2.5 bps to reach 3.38%.
Analyst comments on the development
“It is reasonable to conclude that the deliberate change in language implies the Bank wanted the market to price in a December hike, which we believe is now its baseline scenario,” Noriatsu Tanji, the chief bond strategist at Mizuho Securities told Reuters.
However, he noted that the rise in the 10-year bond yield has been exaggerated by “short-term flow dynamics” and is unlikely to keep trending higher.
“With the market already pricing in a considerable amount of tightening, we do not expect the 10-year JGB yield to continue trending higher,” he said.
BOJ meeting's outcome expectations
The BOJ is set to meet between 18-19 December, with investors closely watching for what could be its first rate hike since January.
The BOJ seems to be proceeding with a hike in its policy rate to 0.75% from 0.5%, which was flagged by Governor Kazuo Ueda in a speech last week, Reuters reported.
“If the BOJ wants to raise rates this month, please make your own decision. That's the government's stance,” said one of the Reuters sources, adding it was nearly certain the bank will proceed with a hike this month.
The central bank kept interest rates on hold at 0.5% in its October 30 meeting, warning of lingering economic "high uncertainties" linked to US trade tariffs.
(With inputs from Reuters)
