JGB yields slide as US CPI data snags focus from BOJ policy

Japanese government bond (JGB) yields edged down on Wednesday (May 15) as investors hit pause on a recent sell-off in bonds to await a US inflation report believed to be key in determining the Federal Reserve’s near-term rate path.

JGB yields, which move inversely to bond prices, have risen to over 10-year peaks this week after the Bank of Japan (BOJ) cut offer amounts for a segment of bonds at a bond-buying operation on Monday.

The surprise reduction has added to recent hawkish signals from Japan’s central bank and propelled the 10-year yield closer to the psychologically significant 1 per cent level.

But investors took a beat before the US consumer price index (CPI) report due later in the day, which many market players see as crucial to the Fed’s decision on whether to cut rates in September.

“The employment side it has been weaker generally this month but there’s still concern about inflation,” said Shinichiro Kadota, chief Japan currency strategist at Barclays.

Fed chair Jerome Powell said on Tuesday (May 14) that while he expects US inflation to continue falling, his confidence “is not as high as it was” due to the first-quarter data.

Rate differentials between the US and Japan have pushed the yen to a 34-year low against the dollar and some market participants suspect the languishing currency may be putting some heat on the BOJ.

“Spring wage negotiation has been strong, inflation remains more sustained, and most people expect it. Yen depreciation would likely add to that pressure,” said Barclays’ Kadota, adding that Barclays is forecasting another rate hike in July.

The 10-year JGB yield fell 0.5 basis point (bp) to 0.955 per cent, while 10-year JGB futures moved in a narrow range, last up 0.06 yen at 143.9 yen.

The two-year JGB yield, which tends to correspond with Japanese policy expectations, ticked down 0.5 basis points to 0.335 per cent. It touched its highest level since June 2009 at 0.345 per cent on Tuesday. REUTERS