Bonds fell across Asia with Japanese yields climbing to a six-year high following a report the central bank is debating how soon it can signal rate hikes. Concern about gathering price pressures also weighed on government debt in Australia and South Korea.
Japan’s five-year yields advanced to the highest level since the central bank introduced its negative interest rate policy in January 2016 after Reuters reported policymakers may push up borrowing costs even before annual inflation reaches its target of 2%. That doesn’t mean a rate hike in imminent, though, the report said, citing people it did not identify.
The Japanese Government Bond (JGB) market has become highly sensitive at this point before next week’s Bank of Japan meeting where it’s expected to tweak its price view even if that’s unlikely to lead to any policy change, said Ataru Okumura, a strategist at SMBC Nikko Securities in Tokyo.
Japan’s five-year yield climbed 2.5 basis points, the most since March, to minus 0.015%. The benchmark 10-year yield rose as much as 2.5 basis points to 0.155%, the highest since February.
Inflation prints have had less of an impact on Asian bonds than they have in the U.S, where Treasuries posted their worst start to a year in more than a decade. Fueling the higher yields were bets the Federal Reserve may raise rates as soon as in March to contain surging inflation.
The Fed’s tightening plans, a weak yen and concern over rising costs in Japan, however, are prompting the BOJ to mull a future exit plan, Reuters reported. The Bank of Korea on Friday said it expected inflation to stay above the mid-2% range “for a considerable time,” after it raised rates for the third time since summer. Markets are pricing in more than three South Korean rate hikes this year.
Korea’s three-year yields jumped nine basis points to 2.05%, while Australia’s three-year yields rose four basis points to 1.21%. Treasury yields also headed higher in Asian trading, with two-year yields climbing three basis points to 0.92%.
The higher yields in Japan dragged “two- and five-year Australia and U.S. front-end sovereign yields higher in Asia,” said Prashant Newnaha, an Asia-Pacific rates strategist at TD Securities in Singapore. The increase is being driven by “speculation that the Bank of Japan may revise up its growth and inflation forecasts next week and dollar-yen stops have played their part in driving front-end yields higher.”
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