Japanese government bonds plunged on Wednesday, with yields hitting multi-decade and record highs, as renewed inflation concerns stemming from the Middle East situation reignited market expectations for a Bank of Japan interest rate hike.
The yield on Japan's benchmark 10-year government bond surged 6 basis points to 2.6%, reaching its highest level since May 1997. The yield on the policy-sensitive 2-year government bond rose 1 basis point to 1.4%, marking its first return to this level since May 1995.
"Over recent sessions, the market has once again started betting on the Bank of Japan moving forward its rate hike timeline. Even with signs of currency intervention, the yen remains in a weak pattern," said Hisashi Fukumoto, a senior researcher at Nomura Research Institute.
He added, "The Bank of Japan has shifted its policy focus toward curbing price increases, moving away from relying on low interest rates to stimulate economic growth."
The moves in Japan's bond market aligned with a sharp overnight rise in yields for U.S. Treasuries, UK Gilts, and Eurozone bonds, following a surge in crude oil prices driven by geopolitical risks.
The two-year forward one-year swap rate, a gauge of market expectations for the Bank of Japan's terminal policy rate, exceeded 2% on Wednesday. This followed the release of the BOJ's April monetary policy meeting minutes the previous day, in which one policy board member signaled a potential rate hike as early as June.
Data from the interest rate swap market indicated a 69.98% probability that the Bank of Japan will raise its policy rate to 1% at its June meeting.
Yields on Japan's 5-year and 20-year government bonds also reached all-time highs. Bond yields move inversely to prices.
"With several government bond auctions scheduled this month, market participants are taking a cautious stance on positioning in bonds," said Shuichi Osaki, a senior portfolio manager at Meiji Yasuda Asset Management.
The Japanese Ministry of Finance is set to auction 30-year bonds on Thursday and issue 5-year bonds on Friday, with further auctions for 20-year and 40-year ultra-long-term bonds scheduled later this month.
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