“Despite the current yield level, which is high, the auction performance was not strong,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management.
“That’s because the market is concerned that the Bank of Japan (BOJ) is lagging behind in dealing with inflation risk and will have to raise interest rates further,” he said.
Ten-year bond yields climbed to their highest level in nearly three decades last session as markets braced for further rate hikes from the BOJ.
The central bank raised its key rate to 0.75% from 0.5% last month, but the yen has struggled to regain ground as markets expect the pace of BOJ rate hikes to remain slow.
A weaker yen increases import costs and fuels inflation, reinforcing expectations of further rate hikes. Markets now expect the BOJ’s terminal interest rate to rise to around 1.7%, based on forward one-year overnight index swaps (OIS) two years ahead, which price around 1.6956%, according to Inadome.
The OIS, an interest rate for converting the overnight rate and a fixed rate, provides an effective way to monitor market perceptions of the BOJ’s monetary policy.
Yields on longer-term bonds also rose, with the yield on 20-year Japanese government bonds rising 1.5 basis points to 3.06%.
The yield on 30-year Japanese government bonds rose by 2 basis points to 3.475%.
The yield on two-year government bonds fell by 0.5 bp to 1.185%. The five-year interest rate remained stable at 1.595%.
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