- The yield on the benchmark 10-year Japanese government bond touched 2.73%, marking the highest level since May 1997, with a single-day increase of up to 10 basis points.
- Data from the Tokyo short-term interest rate swap market shows that the probability of the Bank of Japan (BoJ) raising rates by 25 basis points at the June 16 meeting has risen to 78%.
- Due to the impact of the Middle East conflict, crude oil prices remain above $100 per barrel, exacerbating global inflation concerns and jointly pushing up U.S. bond yields.
Yield Curve Shifts Upward Across the Board
On Friday, the Japanese bond market experienced a wave of sell-offs, with yields on government bonds of all maturities rising, indicating that the market is accelerating the pricing of the Bank of Japan's (BoJ) tightening path. In addition to the benchmark 10-year bond, the 5-year government bond (JP5YTN=JBTC) reached a milestone high of 2.00%, while the 20-year government bond (JP20YTN=JBTC) recorded a historic high of 3.615%. This simultaneous rise reflects a strengthening consensus among investors that the era of long-term low interest rates is ending. Since yields and bond prices move inversely, bond market valuation pressure is at its highest in years.
Wholesale Inflation Surpasses Expectations, Triggering Hawkish Pricing
Official data shows that Japan's wholesale inflation rate in April reached its fastest pace in three years, directly sparking market concerns about runaway prices. Mizuho Securities pointed out that the accelerated transmission of wholesale prices suggests that the consumer price index (CPI) at the retail end may remain above target levels in the coming months. This marginal change in the inflation structure provides solid factual grounds for the Bank of Japan (BoJ) to take tightening measures at the June meeting, prompting previously cautious traders to turn bearish on the bond market.
Contagion from U.S. Treasury Yields
The turmoil in the Japanese bond market is not an isolated event. Recent U.S. Treasury yields have reached an 11-month high, providing additional upward momentum for the Japanese market. The Federal Reserve (Fed) is facing a similarly severe inflation environment, especially with the energy premium caused by geopolitical tensions in the Middle East. When the U.S. 10-year Treasury yield remains volatile at high levels, the pressure for global capital allocation rebalancing is forced to transmit to Japan. Traders are currently closely monitoring changes in the U.S.-Japan interest rate differential, and if the Federal Reserve (Fed) maintains a hawkish stance, Japanese government bond yields may face further valuation restructuring.
Reorganization of Expectations in the Currency Swap Market
In the Tokyo short-term interest rate swap market, the shift in interest rate expectations is particularly aggressive. Current pricing shows a 78% probability of a rate hike in June, significantly higher than at the beginning of last week. This indicates that market participants have largely absorbed the possibility of the Bank of Japan (BoJ) raising the policy rate to the 0.25% to 0.50% range. Mizuho Securities' chief bond strategist Noriatsu Tanji emphasized that unless geopolitical conflicts lead to a large-scale, substantial stagnation in global economic activity, the trend of the Bank of Japan (BoJ) returning to policy normalization is irreversible.
