Japan Economic & Financial Weekly
- Nov 28, 2023
JGB yield and yield curve scenarios for December and 2HFY23-FY26
JGB yield and yield curve scenario for December
The 10- and 20-year JGB yields and yield curve scenario for December
The 10-year JGB yield moves higher in December in a technical reversal. Despite continued downward pressure when the 10-year UST yield tests the downside, it experiences upward pressure in the event of renewed concerns about early BoJ policy revisions. The 20-year JGB yield trades at a level that keeps the 10s20s JGB spread at just over 70bp.
The BoJ’s November Bond Market Survey, released on December 1, shows only a modest improvement in the negative market functioning DI ("high" - "low") despite the more flexible approach to YCC adopted at the October 31 Policy Board meeting. This revives speculation of an official end to the policy at the December18-19 meeting, in which case the 10-year JGB yield rises on speculative selling. However, it subsequently falls back when the Bank decides to leave policy on hold, prompting investors to cover their shorts.
At the press conference following the December meeting, BoJ Governor Kazuo Ueda notes that the virtuous cycle of wages and prices has gained further momentum and that there is now an even greater likelihood of achieving the 2%price target, given the preliminary Monthly Labour Statistics for October (Dec 8)and the results of the December Tankan survey (Dec 13).1Renewed bond market speculation of an early end to NIRP puts upward pressure on the 10-year JGB yield. The November US payrolls report (Dec 8) points to softer labor market conditions, and the November US CPI print (Dec 12) indicates weaker inflationary pressures. After the FOMC meeting on December 13, the US Treasury market watches Chair Jerome Powell’s press conference for hints that the Fed is toning down its hard-line stance against inflation, and the 10-year UST yield tests the downside on expectations that rate cuts will start sooner than expected. Although the 10-yearJGB yield comes under downward pressure as a result, speculation of early BoJ policy revisions helps keep the decline in check. December 13 is the final trading day for the December futures contract, and rolling of short positions may create some turmoil. December 20 is a large redemption day for coupon-bearing JGBs. We estimate net market redemptions (ex BoJ holdings) at about JPY6.4 trillion, and reinvestment of the proceeds could weigh on JGB yields. The Cabinet approves the MoF’s JGB issuance plan for FY24 towards the end of December. JGB yields experience downward pressure if calendar-base market issuance comes in lower than the JPY139.6 trillion in the initial budget for FY23.
Adjustments to issuance duration (which will depend on prevailing demand) lift yields in maturities with higher issuance and lower them in sectors with reduced issuance.
The BoJ’s November Bond Market Survey, released on December 1, shows only a modest improvement in the negative market functioning DI ("high" - "low") despite the more flexible approach to YCC adopted at the October 31 Policy Board meeting. This revives speculation of an official end to the policy at the December18-19 meeting, in which case the 10-year JGB yield rises on speculative selling. However, it subsequently falls back when the Bank decides to leave policy on hold, prompting investors to cover their shorts.
At the press conference following the December meeting, BoJ Governor Kazuo Ueda notes that the virtuous cycle of wages and prices has gained further momentum and that there is now an even greater likelihood of achieving the 2%price target, given the preliminary Monthly Labour Statistics for October (Dec 8)and the results of the December Tankan survey (Dec 13).1Renewed bond market speculation of an early end to NIRP puts upward pressure on the 10-year JGB yield. The November US payrolls report (Dec 8) points to softer labor market conditions, and the November US CPI print (Dec 12) indicates weaker inflationary pressures. After the FOMC meeting on December 13, the US Treasury market watches Chair Jerome Powell’s press conference for hints that the Fed is toning down its hard-line stance against inflation, and the 10-year UST yield tests the downside on expectations that rate cuts will start sooner than expected. Although the 10-yearJGB yield comes under downward pressure as a result, speculation of early BoJ policy revisions helps keep the decline in check. December 13 is the final trading day for the December futures contract, and rolling of short positions may create some turmoil. December 20 is a large redemption day for coupon-bearing JGBs. We estimate net market redemptions (ex BoJ holdings) at about JPY6.4 trillion, and reinvestment of the proceeds could weigh on JGB yields. The Cabinet approves the MoF’s JGB issuance plan for FY24 towards the end of December. JGB yields experience downward pressure if calendar-base market issuance comes in lower than the JPY139.6 trillion in the initial budget for FY23.
Adjustments to issuance duration (which will depend on prevailing demand) lift yields in maturities with higher issuance and lower them in sectors with reduced issuance.
Forecast range:
10-year JGB yield: 0.720%–0.850%
20-year JGB yield: 1.440%–1.570%