Japanese bond yields surged on Thursday, with the two-year government bond yield rising to its highest level since 1996, as expectations rose for a near-term interest rate hike by the Bank of Japan.
The two-year rate, which is sensitive to monetary policy expectations, rose 1 basis point to 1.315%, highest in nearly three decades, surpassing a previous high of 1.31% reached last month. The 10-year yield rose 2 basis points to 2.270%.
Meanwhile, Asian markets traded mixed as investors watch out for the latest efforts to end the ongoing US-Iran war in the Middle East.
Why are Japanese Bond Yields Rising?
Japanese government bond yields have risen, while bond prices have declined, tracking a broader global selloff in fixed-income markets. The move reflects mounting concerns over persistent inflation, driven by a surge in crude oil prices following the escalation of the US-Iran war.
Central banks around the world have signaled prolonged price pressures, pushing short-term yields higher, while market participants have scaled back expectations of monetary easing by the US Federal Reserve.
According to the CME Group’s FedWatch tool, the probability of a Fed rate hike by December has declined to 18% from around 30% in the previous session. Prior to the conflict, markets had been pricing in at least two rate cuts this year.
Elevated crude oil prices have also weighed on the Japanese yen. A weaker yen can increase inflation, which may push the Bank of Japan (BOJ) to continue raising interest rates. Market indicators suggest there is a 64% chance that the BOJ could raise rates as early as April. BOJ Governor Kazuo Ueda has also hinted that a rate hike is still possible.
Additionally, sustained wage growth — with Japan’s largest labour union group reporting average pay increases exceeding 5% for a third consecutive year — underscores the persistence of inflationary pressures in the economy.
(With inputs from Reuters)
