Market speculation that the Bank of Japan will accelerate its interest rate hikes, combined with rising geopolitical tensions pushing up oil prices and stoking inflation fears, led to a broad increase in Japanese government bond yields on Wednesday.
Investors were also closely watching the release of the US Consumer Price Index (CPI) later in the day for clues on the Federal Reserve's future policy path. Japan's 10-year benchmark government bond yield rose 4.5 basis points to 2.850%, while the 5-year yield climbed 2.5 basis points to 2.110%, reaching an all-time high. Yields and bond prices move inversely. The 2-year yield, most sensitive to the BOJ's policy rate, gained 3.5 basis points to 1.645%, its highest level since May 1995.
Traders are now broadly pricing in a rate hike from the BOJ in September, a significant shift from earlier expectations of a move in December. If implemented, the September increase would come exactly six months after the central bank's most recent hike in June. This change in sentiment is driven by two main factors: recent joint US-Japan currency intervention to boost the yen, and a hawkish tone in the minutes of the BOJ's July policy meeting. Naohiko Baba, chief Japan economist at Barclays, noted in a research report that the minutes released on Monday "sent a clear signal that board members lean toward an interest rate hike at the September meeting." Data from Tokyo Tanshi showed that as of Tuesday midday, the market was pricing in a 78% chance of a September rate hike, up from 66% on Monday afternoon.
In the long end of the curve, the 20-year Japanese government bond yield rose 3 basis points to 3.715%, while the 30-year yield increased by 4 basis points to 3.990%. Oil prices edged higher on Wednesday, supported by comments from Iran's top security official who stated that the key Strait of Hormuz shipping lane would remain blocked unless the US accepts Iran's ceasefire terms. This was compounded by reports of shipping attacks involving both the US and the Iran-backed Houthi rebels in Yemen. Brent crude oil futures rose 0.74% to $89.57 per barrel, while US West Texas Intermediate (WTI) crude gained 0.76% to $83.84 per barrel.
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