Japan's 10-year bond yield reaches 5-month high ahead of BOJ meeting

JGB bond yields: Japan's 10-year government bond (JGB) yield surged to a five-month high on Wednesday as anticipation mounted for potential signals of another rate hike at the Bank of Japan's (BOJ) upcoming policy meeting.

The 10-year JGB yield, JP10YTN=JBTC, climbed 1 basis point (bp) to 0.89 per cent, marking its highest level since November 11. Meanwhile, the five-year yield, JP5YTN=JBTC, rose by 0.5 bp to 0.495 per cent.

Market analysts speculate that the BOJ is likely to project inflation to hover around its 2 per cent target for the next three years in its new forecasts, signaling a potential readiness to increase interest rates later this year from their current near-zero levels.

The two-year JGB yield, JP2YTN=JBTC, remained flat at 0.3 per cent, reaching its highest level since July 2009. This yield is particularly sensitive to the BOJ's policy decisions.

Despite earlier concerns, the BOJ maintained the amounts for its regular bond purchases unchanged, with some strategists suggesting that adjusting these amounts could potentially mitigate the pace of yen depreciation.

"Ataru Okumura, senior strategist at SMBC Nikko Securities, commented, "If the BOJ cuts the amounts of the regular bond buying, it may be able to slow the pace of the yen weakening."

While the BOJ recently shifted away from negative interest rates, the yen continues to trade near a 34-year low amid expectations of prolonged higher rates in the United States.

Market expectations suggest that Japan's inflation could accelerate due to the weakening yen and increasing oil prices, consequently exerting upward pressure on JGB yields, according to Keisuke Tsuruta, fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

The break-even inflation rate, reflecting the difference in yields between 10-year inflation-linked bonds and 10-year JGBs, reached 1.5575 per cent on Wednesday, surpassing the 10-year peak observed in November.

In other bond yields, the 20-year JGB yield, JP20YTN=JBTC, remained unchanged at 1.660 per cent, while the 30-year JGB yield, JP30YTN=JBTC, dipped by 0.5 bp to 1.945 per cent.

(With Reuters inputs.)