Japanese government bond (JGB) yields backed up sharply by over 10 basis points, from 0.44% to 0.55% as a result. The 10-year US Treasury yield temporarily pierced 4%, fueled in part by the earlier-than-anticipated move by the BoJ, while stronger-than-expected growth numbers were also a material driver.
Assuming the BoJ takes a measured approach as implied by the central bank’s language to “smooth upside,” we don’t believe this is significant for US fixed income markets. However, more aggressive action could bias global yields higher. Japan is the largest holder of US Treasuries, and while JGB yields are still a long way from US yields, any meaningful increase reduces Japan’s incentive to invest in foreign bonds at the margin.
Coming out in front of this week’s refunding announcement, which is expected to show a material increase in Treasury supply in 2H23 and into 2024—alongside the potentially market-moving Fed meeting at Jackson Hole at the last week of August—this news is yet another factor that could contribute to rate volatility in the coming weeks. But at end of the day, we expect the business cycle to dominate the direction of travel for US yields. We still expect growth to slow and the 10-year Treasury yield to trend toward 3.25–3.5% by year-end.
Ultimately, the biggest impact should be felt in currency markets, where the Japanese yen initially rallied against the US dollar, although it has since given up those gains. Normalizing monetary policy in Japan is the main reason for our view of a stronger JPY versus the USD moving forward.
Main contributor: Solita Marcelli
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