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Masahiko Loo, senior fixed income strategist, State Street Investment Management, Tokyo:
"A 10-year JGB yield at 3% is undoubtedly a milestone, but I would view it more as a normalisation story than a crisis story. Markets are repricing for a higher inflation regime, a higher neutral rate and growing confidence that the BOJ has further to go. Bond investors are looking at a combination of inflation risk, heavy supply and term-premium repricing.
"The Middle East escalation matters less for geopolitics itself and more because oil back at $80 (range) raises the risk of stickier inflation heading into winter. Investors are increasingly demanding greater compensation to own duration as sovereign issuance and corporate funding needs compete for the same pool of capital.
"The other underappreciated factor is Japan. The story is not large-scale repatriation, but Japan gradually ceasing to be the marginal buyer of foreign bonds. Less incremental demand from one of the world's largest pools of savings is helping push term premium higher globally. This is why the selloff feels more like a buyers' strike than a sellers' panic. Bond investors are less worried about growth and increasingly focused on inflation and supply."
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Andrew Lilley, chief rates strategist, Barrenjoey, Sydney:
"I think really most of its selloff has been a re-assessment of Fed policy. I think the Fed hikes in September and I think it's the beginning of the three-rate hike cycle at minimum.
"If they're not hiking, term premia has to rise...and that sort of dynamic is a sign they've maybe let things get a bit ahead of them — its not a great position to be in. You don't want to be in a state where if you don't deliver a tightening, the market delivers half of one for you, because they think that you're running a big risk."
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Ryutaro Kimura, senior fixed income strategist, BNP Asset Management, Tokyo:
"Through the rise in interest rates so far, the bond market has to some extent been sounding a warning against fiscal expansion. The U.S. government, too, has in effect been calling for a shift away from Abenomics and, to some degree, for a change in Japan's expansionary fiscal stance. Despite that, the Japanese government's budget-request amount for next fiscal year has swollen significantly. From the bond market's perspective, I think there is now something of a sense of resignation — tinged with helplessness — about rising interest rates.
"On the other hand, with 3% being a psychological threshold, it may draw out a certain amount of demand. The 10-year JGB auction itself saw a high level of bids, so for the time being we could see yields move sideways somewhat around that level. But once that demand has been filled to some extent, we need to be alert to the possibility that upward pressure on yields could intensify further."
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Eiji Doke, chief bond strategist, SBI Securities, Tokyo:
"Long-term interest rates have reached 3%, but that is probably just a waypoint. Although it is a key threshold, it does not have any particular significance."
"BOJ rate-hike expectations are likely to put upward pressure on yields mainly in the short- to medium-term zone, while concerns over fiscal policy are likely to weigh particularly on the super-long sector. The long-term sector, which lies between the two, ends up facing upward pressure on yields from both sides."
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Prashant Newnaha, senior rates strategist, TD Securities, Singapore:
"It's a genuine regime change. JGBs were the anchor for global fixed income for a long time. Now it has flipped. An extension to this selloff in JGBs could drive a repricing of global fixed income. Further, the last time the 10-year JGB yield was 3%, the debt to GDP ratio was around 100%. Now it's 250%.
"So while a lot of the market's focus has centered on monetary policy and the trajectory of BOJ hikes, this push in 10-year yields to 3% could renew the markets attention to fiscal. More broadly, a further rise in JGB yields would make carry trades less attractive and could drive a gradual re-allocation into Japanese assets."
TLT•
