Bond Yields Rise on Bank of Japan's Interest Rate Hints

Overview

Bond yields experienced an increase on Monday as the Bank of Japan hinted at the possibility of ending negative interest rates. Additionally, traders are keeping a close eye on crucial U.S. data set to be released later in the week.

Key Details

• The yield on the 2-year Treasury, BX:TMUBMUSD02Y, rose by 1.3 basis points to 4.986%. It is important to note that yields move in the opposite direction to prices.
• The yield on the 10-year Treasury, BX:TMUBMUSD10Y, increased by 1.5 basis points to 4.286%.
• The yield on the 30-year Treasury, BX:TMUBMUSD30Y, climbed by 3 basis points to 4.369%.

Market Drivers

Government bond yields predominantly saw an upward trend on Monday following indications from the Bank of Japan that it may soon end its negative interest rate policy.

There was a rise in ten-year JGB (Japan Government Bond) yields, BX:TMBMKJP-10Y, surpassing 0.7% and reaching their highest level since 2014. This increase had a knock-on effect on U.S. and European yields with similar durations. Bank of Japan Governor Kazuo Ueda revealed in an interview with the Yomiuri newspaper over the weekend that by the end of 2023, the central bank should have a clearer idea of whether its decade-long implementation of an easy monetary policy can be concluded.

Ueda reportedly stated, "Once we are confident that Japan will experience sustained increases in inflation, accompanied by wage growth, we have various options available. If we determine that Japan can achieve its inflation target even after ceasing negative interest rates, we will do so."

Investors Eye U.S. Monetary Policy Ahead of Key Data Releases

Investors are closely monitoring the prospects for U.S. monetary policy as important data releases approach. On Wednesday, consumer prices data will be released, followed by a retail sales report on Thursday. These reports will impact the Federal Reserve's decision-making process leading up to its rate-setting meeting next week.

According to the CME FedWatch tool, markets are currently pricing in a 93% probability that the Fed will leave interest rates unchanged within a range of 5.25% to 5.50% after the meeting on September 20.

Looking ahead to the subsequent meeting in November, there is a 39% chance of a 25 basis point rate hike, bringing the range to 5.50% to 5.75%.

Speculation suggests that the central bank won't lower its Fed funds rate target to around 5% until July 2024, as indicated by 30-day Fed Funds futures.

Expert Analysis

Analysts have weighed in on the upcoming data releases and their potential impact on the market.

Jim Reid, a strategist at Deutsche Bank, stated, "If last week was a bit light on important data, you can't say the same about this week's high-impact extravaganza that will occur in a Fed blackout period as next week's FOMC lurks in the wings."

Reid highlighted the significance of the U.S. CPI data release on Wednesday, stating that it will be the standout report. He also mentioned the importance of the U.S. PPI and retail sales reports on Thursday, implying that certain PPI subcomponents are influential in the Fed's preferred core PCE. Additionally, he noted that the retail sales report will provide insight into the momentum lost after a remarkably strong July print.