By Brigid Riley
TOKYO- Japanese government bond (JGB) yields rose on Monday, as investors continued to unwind positions taken up in the bond rally earlier this month amid easing fears of a US recession.
Investors had snapped up bonds at the start of the month after a weak US jobs report sparked widespread concerns of a US recession.
But a string of economic data last week has revived expectations of a soft landing for the world’s largest economy, and JGB yields have marched up as slowdown fears fade.
With little other material to drive the market, Monday’s upward movement “basically seems like a reversal of the decline in yields”, said Keisuke Tsuruta, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
The benchmark 10-year JGB yield was up 2.5 basis points (bps) at 0.895 percent while 10-year JGB futures was down 0.23 yen at 144.6 yen.
There was some caution toward an auction of 20-year JGBs scheduled for Tuesday, Tsuruta said.
The 20-year JGB yield rose 3 bps to 1.715 percent .
Later this week, Bank of Japan (BOJ) Governor Kazuo Ueda will make an appearance before Japan’s parliament to discuss the bank’s decision last month to raise interest rates.
The BOJ caught markets by surprise when it hiked rates to a 15-year high last month and signaled its readiness to raise rates further.
That hawkish shift, along with US hard landing concerns, sent Japan’s stock market plummeting on Aug. 5.
Given the market stress that followed the BOJ’s July decision, Ueda may be limited in what he can say about the bank’s rate path, said Mitsubishi UFJ Morgan Stanley’s Tsuruta.
“I’m not expecting any particularly hawkish comments at this point.”
Elsewhere on the curve, the two-year JGB yield ticked up 1 bp to 0.36 percent , while the five-year yield rose 3 bps to 0.52 percent .
The 30-year JGB yield also climbed 3.5 bps to 2.075 percent .
The US dollar declined broadly on Monday and slipped sharply against the yen in particular as investors bet on a dovish tone emerging in the Federal Reserve’s July policy meeting minutes and Chair Jerome Powell’s upcoming speech at Jackson Hole.
The minutes, due on Wednesday, and Powell’s speech on Friday are likely to be the main drivers of currency movement for the week, which will also see inflation data from Canada and Japan alongside Purchasing Managers’ Index readings across the US euro zone and UK.
Against the yen, the greenback fell more than 1 percent to 146.01 after earlier slipping below the 146 yen level.
Analysts attributed the big move lower to broad dollar weakness, along with the potential for further policy divergence between the US and Japan.
Bank of Japan (BOJ) Governor Kazuo Ueda is set to appear in parliament on Friday, where he is expected to discuss the central bank’s decision last month to raise interest rates.
“Certainly seems like a dollar-driven move, but market is also likely positioning for policy divergence to be evident again later in the week with Powell to continue to point towards a September rate cut when he speaks at the Jackson Hole conference while BOJ’s Ueda could keep an element of hawkishness on the table,” said Charu Chanana, Saxo’s head of FX strategy.
The BOJ’s hawkish tilt last month contributed to the early August market turbulence in the wake of a massive unwinding of yen-funded carry trades, triggering a heavy selloff in risk assets and sending stock markets, including the Nikkei crashing.
The volatility back then was compounded by a slew of softer-than-expected US economic data – in particular, a weak jobs report for July, as investors feared the world’s largest economy was headed for a recession and that the Fed was being slow in easing rates.
Elsewhere, the euro last bought $1.1043, edging towards an over seven-month high of $1.10475 hit last week. Sterling rose to a one-month high of $1.2960 earlier in the session and was last at $1.2957.
Against a basket of currencies, the dollar fell to a seven-month low of 102.11.
Traders have fully priced in a 25-basis-point rate cut from the Fed in September, with a 24.5 percent chance of a 50 bp move. Futures point to over 90 bps worth of easing by year-end.
