Japan yields drift as traders seek balance between hawkish Fed, dovish BOJ

JAPANESE government bond yields were mixed on Wednesday (Sep 27) in a largely directionless session, as investors sought to balance the “higher for longer” outlook for overseas interest rates against a dovish redux at the Bank of Japan.

The benchmark 10-year JGB yield was flat at 0.74 per cent, after earlier sinking as low as 0.73 per cent amid pressure from a retreat in US yields from more than decade highs.

Benchmark JGB futures finished 0.02 yen lower at 145.29 (S$1.33), flipping from gains of as much as 0.13 yen earlier in the day.

The five-year yield lost 0.5 basis point (bp) to 0.285 per cent, while the two-year was flat at 0.025 per cent.

Superlong yields flipped from early declines, with the 20-year adding 0.5 bp to 1.46 per cent and the 30-year up 1 bp at 1.71 per cent.

The benchmark US 10-year Treasury yield retreated to 4.3516 per cent on Wednesday, catching its breath following a 45.5 bps climb this month to a 16-year peak at 4.566 per cent overnight.

Contrasting with the Federal Reserve’s hawkish stance at last week’s policy meeting, the BOJ affirmed its position as a dovish outlier on Friday, vowing to “patiently maintain ultra-loose monetary policy.”

Speculation had previously been building for a phasing out of stimulus as early as this year after BOJ Governor Kazuo Ueda seemed to take a hawkish tilt in an interview with the Yomiuri newspaper.

Two-year JGB yields rose to an eight-month high on 0.05 per cent in mid-September, while the 10-year yield had hovered at a decade-high of 0.745 per cent for most of the past week.

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BOJ keeps ultra-loose policy, dovish guidance on outlook

“The general trend is still for policy normalisation,” but “the market is already discounting something like a 30 basis-point rate hike within the year,” said Naka Matsuzawa, chief Japan macro strategist at Nomura Securities.

“That’s a level that I think the BOJ would think is a little overdone.” REUTERS