Japanese 10-Year Bond Yields Soar to 16-Year Highs Amid Rate-Hike Hopes and Global Sell-Off: What Investors Need to Know

On October 30, 2023, the Nikkei 225 Stock Average was prominently displayed at the Tokyo Stock Exchange (TSE). Recent developments, including Israel’s intensified military activity in Gaza, have put added strain on global markets. Investors are gearing up for a week full of important central bank meetings and significant announcements regarding US bond sales.

This past Thursday, Japanese government bond yields climbed sharply. The yield on the 10-year Japanese Government Bond (JGB) reached its highest point since June 2009, crossing the 1.5% mark. The yield on 30-year bonds rose 13 basis points, surpassing 2.5%, a level not seen since 2008. Analysts, including Masahiko Loo from State Street Global Advisors, linked this surge to a global sell-off in bonds, as the U.S. 10-year Treasury yield also increased to 4.317%.

Yujiro Goto, a currency strategy expert at Nomura, mentioned that the JGB market is facing supply and demand issues. He also highlighted a significant rise in German bond yields, as expectations for increased fiscal spending in the EU add pressure on global yields. The German 10-year bond yield recently spiked to 2.8%, its highest since October 2023.

Comments from Bank of Japan Deputy Governor Shinichi Uchida played a role in the fluctuations. He indicated that the bank might raise interest rates in line with market expectations. This statement has made many investors cautious, especially with the end of the financial year approaching in March.

Last week, Uchida also stated that the central bank would continue to taper its government bond purchases despite rising yields. As it moves away from its ultra-loose monetary policy, the Bank of Japan plans to reduce JGB purchases by about 400 billion yen each quarter, marking a significant shift in its strategy.

Market reactions have been influenced by rising Japan inflation. Mitul Kotecha from Barclays noted that real inflation may be even higher than reported, contributing to a hike in yields. Japan’s headline inflation has exceeded the Bank of Japan’s 2% target for over two years, recently reaching a two-year high of 4%. The “core-core” inflation rate, which excludes fresh food and energy prices, rose to 2.5%, its highest since March 2024. These inflation trends lead to expectations of more rate hikes from the Bank of Japan, further pushing up bond yields.

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