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 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 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 .
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)