JGB yield and yield curve scenarios for March and FY24-FY26
Preview of long- and super long-term JGB yields for March
The 10-year JGB yield trades with an upward bias. Concerns about an earlier-than-expected end to NIRP gradually build ahead of the March 18-19 Policy Board meeting. After this meeting, an unwinding of negative interest rates at the April 25-26 Outlook Report meeting starts to look increasingly likely. Policy Board member Hajime Takata will attend a meeting of business leaders in Shiga prefecture on February 29, and Board member Junko Nakagawa will join a similar gathering in Shimane prefecture on March 7. Both are scheduled to address the groups and hold press conferences. Neither says anything that goes beyond the official views of the Bank as stated in the January Outlook Report -- namely, that the likelihood of achieving the price outlook continues to gradually increase. Still, JGB market participants search for clues that the Bank is preparing to winddown NIRP in March. Many large companies give their responses to labor unions’ wage hike demands on March 13, and on the 15th the Rengo trade union confederation releases the first round of results from this year’s negotiations. If the average increase in base pay exceeds last year’s figure of 2.12% by even a small margin, JGB market participants conclude that the BoJ has confirmed a strengthening of the virtuous cycle of wages and prices and will seek an opportunity to wind down NIRP in March.
At the March 18-19 Board meeting, the BoJ opts not to wind down NIRP and leaves its ultra-easy monetary policy on hold. Some market participants who had sold bonds in anticipation of an end to NIRP are forced to buy them back, sending the 10-year JGB yield briefly lower. However, the downside for yields is limited since speculation of an end to NIRP persists. And if the market senses from Governor Kazuo Ueda’s post-meeting press conference that the policy is likely to be wound down at the April meeting, the 10-year JGB yield quickly reverses higher. The Summary of Opinions for the March Policy Board meeting, set for release on March 28, shows that the Policy Board is nearing a conclusion on ending negative interest rates. Bond market participants then see an April unwinding of NIRP as being even more likely, and the 10-year JGB yield resumes testing the upside. However, the 10-year yield also takes on a downward bias at times. Potential triggers include data offering further confirmation of a steady cooling of US inflationary pressures, such as the February payrolls report (Mar 8) or the February CPI print (Mar 12). This would boost expectations of a Fed rate cut, pushing the10-year UST yield lower and weighing on the 10-year JGB yield as well. The latter might also decline around the large JGB redemptions scheduled for March 21. We estimate that redemptions of net market issuance (excluding BoJ holdings) will amount to around JPY7 trillion, and bond yields could come under downward pressure if that drives reinvestment demand. The 30-year JGB yield trades at a level that keeps the 10s30s JGB spread at around 100bp, and the 10-30 year sector of the curve continues to bear flatten.
