TOKYO – Japanese government bonds were mixed on Friday, with optimism about a near-term end to the Iran war pulling longer-dated yields lower, while speculation for earlier Bank of Japan tightening lifted shorter-dated yields. The yields on Japan’s longest-dated debt fell in line with moves in U.S. Treasuries overnight, following reports that the U.S. and Iran have neared a final draft of a peace deal.
Yields globally have been rising with the price of oil as the war stoked worries about inflation. Yields rise when bond prices fall.
The 30-year JGB yield fell 2 basis points to 4% on Friday, and the 40-year yield sank 3 bps to 4.21%. The 20-year yield was flat at 3.69%.
“The prolonged conflict in the Middle East has led to persistent concerns about a medium-term deterioration of Japan’s fiscal position due to open-ended energy subsidies,” Yusuke Matsuo, senior market economist at Mizuho Securities, wrote in a client note.
“We think it will be difficult to stabilise the situation unless the underlying conflict in Iran, with its global effects, is resolved.” Finance Minister Satsuki Katayama sought to reassure investors by saying the government will seek to avoid overly relying on new debt issuance if it were to compile an extra budget to combat a rise in prices.
Meanwhile, 10-year JGB yields rose 2.5 bps to 2.785% and five-year yields added 1.5 bps to 2.02% as traders shifted to a more hawkish view on BOJ policy. Two-year yields were flat at 1.44%. BOJ board member Junko Koeda said on Thursday that the BOJ should raise rates at an “appropriate pace” as underlying inflation could go above the 2% target. Japanese core inflation hit a four-year low in April, data showed on Friday, but failed to sway the market with economists saying war-driven price effects won’t show up until June or July.
Traders currently see about 74% odds of the BOJ raising rates on June 16, according to LSEG data.
(Reporting by Kevin Buckland; Editing by Harikrishnan Nair)
