- The yield on Japan's 10-year government bonds rose by 7.5 basis points to 2.775% on Monday, reaching 2.800% during the session, marking the highest level since October 1996.
- A global sell-off in sovereign bonds resonated with rising oil prices due to the Middle East situation, boosting global inflation expectations, with benchmark yields in the US and Eurozone rising in tandem.
- The market's pricing probability for a Bank of Japan (BOJ) rate hike in June has increased, while news of the Japanese government's plan to compile a supplementary budget has heightened concerns about long-term government bond supply.
Characteristics of an Overall Upward Shift in the Yield Curve
The recent sell-off in the Japanese Government Bond (JGB) market has shown characteristics across the entire curve. Besides the 10-year benchmark bond, the 5-year government bond yield rose by 3.5 basis points to 2.020%, briefly hitting a historical high of 2.025% during the session. On the long end, according to Japan Bond Trading Company data, the 20-year government bond yield also surged by 9.5 basis points to 3.735%, reaching a high not seen since August 1996. The overall steepening of the yield curve reflects a market reassessment of inflation persistence and potential tightening cycles. If global energy prices remain elevated, Japan's domestic import-driven inflation pressure may further raise the interest rate center.
Policy Expectations and Fiscal Disturbances
After the Bank of Japan kept rates unchanged at its April meeting, its forward guidance was interpreted by the market as leaning hawkish. Currently, traders are heavily betting on a potential rate hike at the June monetary policy meeting. Additionally, marginal disturbances are coming from the fiscal side. Reports indicate that the Japanese government is planning to introduce a supplementary budget to address high fuel costs, a move that has sparked concerns about increased government bond issuance and fiscal discipline, thereby exacerbating upward pressure on yields from the supply-demand perspective.
Institutional Views and Market Pricing Logic
The interconnectedness of global bond markets is evident in this volatility. Last Friday, US Treasury yields jumped to a one-year high due to inflation concerns and geopolitical premiums, with Italian and German government bond yields also showing a synchronous upward trend. Ataru Okumura, a senior rate strategist at SMBC Nikko Securities, noted that upward pressure is spreading from the Japanese and UK markets to the US and Eurozone. The institution believes that although the supplementary budget news accelerated the sell-off, given that the specific scale has not yet been determined, the pricing reaction in the long-term bond market may be overly discounted in the short term.
