Japan shorter-end yields fall as stronger yen dims rate hike bets
TLT•Shorter-dated JGB yields ease
Yields on shorter-dated Japanese government bonds fell on Wednesday, as the stronger yen dimmed bets on the Bank of Japan's aggressive rate hikes.
The two-year yield JP2YTN=JBTC, most sensitive to the BOJ's policy, fell 1 basis point to 1.835%. The five-year yield JP5YTN=JBTC fell 1.5 bps to 2.22%. Yields move inversely to bond prices.
Yen strength and policy expectations
The yield curve has been shifting over the last several sessions as the market assesses the impact of the yen's sudden rise against the U.S. dollar on the central bank's policy.
"The markets are watching the yen's move closely. If the currency keeps its momentum, inflation worries slow down so that traders want to buy longer ends," said Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management.
"On the other hand, if the stronger yen reduces inflation worries, expectations for the BOJ's faster rate hikes would weaken," he said.
Longer-end bonds and the curve outlook
The JGBs saw a sharp rally last week as investors scooped up super-long maturities to unwind curve-steepening trades after the yen firmed up sharply. A stronger yen eases inflationary pressure by lowering import costs.
The trades were mixed this week as some investors sold longer ends while weighing Japan's aggressive spending.
"In the long run, the curve will be flattening, as I see few cues for the curve to steepen," said Shinji Ebihara, head of rates strategy group at Tokio Marine Asset Management.
Market worries that the BOJ is falling behind the curve in dealing with inflation have receded amid U.S. pressure, he said.
