A global bond sell-off that intensified two weeks ago has eased, but traders remain cautious on government debt amid rising rate hike expectations and surging oil prices. Japan's bond market is particularly in focus.
Japan's 10-year government bond yield recently hit levels not seen since September 1996, while the 30-year yield surged to a record high. Investors are dumping bonds due to inflationary pressures and expectations that the Bank of Japan (BoJ) will raise interest rates.
Despite government measures like capping gas prices, producer prices rose at their fastest annual pace since May 2023. The yen also weakened, approaching the 160 level against the dollar.
Capital Economics' Thomas Mathews noted that while most of the rise in yields has been benign, the market is approaching a point where the 'reflation trade' is fully priced in. Further inflation could force the BoJ to act via rate hikes or balance sheet adjustments.
Mathews added that Japan's bond yield curve shows 'bear steepening' unlike other advanced economies, drawing attention from policymakers including at G7 meetings. The primary driver is concern over Japan's fiscal position, exacerbated by energy price caps and potential supplementary budgets.
