Global bond yields experienced an upward trend on Thursday amid growing apprehensions regarding the Bank of Japan’s potential plans to tighten its monetary policy. Additionally, traders had their eyes on the upcoming U.S. jobs data.
It is believed that the Bank of Japan may soon halt its negative interest rate policy due to consistently exceeding its 2% inflation target for over 19 months. This ultra-loose monetary policy, which presently features interest rates at minus 0.1% and involves the control of bond yields through the purchase of government debt, is a significant source of global liquidity. It has also played a pivotal role in supporting other assets, including U.S. Treasurys.
Traders’ wagers indicate a heightened probability of a rate increase by the Bank of Japan this month. At one point, these bets stood at 45%, a substantial increase from less than 4% recorded at the beginning of the week. These sentiments were particularly reinforced after Deputy Governor Ryozo Himino presented a potential scenario for policy tightening on Wednesday.
Governor Kazuo Ueda further fueled speculation when he mentioned during a parliamentary hearing on Thursday that managing monetary policy would become more challenging in the coming months.
James Harte, an analyst at Tickmill Group, observed that traders are evidently sensing a stronger likelihood of an early next year normalization of the Bank of Japan’s policy.
In light of weak demand during a 30-year Japanese government bond auction on Thursday, investors expressed their desire for a higher yield. As a result, the 30-year Japanese bond yield BX:TMBMKJP-30Y saw an increase of 10 basis points to reach 1.695%. Additionally, the 10-year BX:TMBMKJP-10Y experienced a surge of 11 basis points to reach 0.756%. Consequently, the Bank of Japan intervened with unscheduled purchases to mitigate the situation.
Market Reversal Sends Shockwaves across Europe and United States
The recent shifts in the financial landscape have caused widespread reactions in both Europe and the United States. The 10-year Treasury yields experienced an increase of approximately 4 basis points, while German bunds of equivalent maturity initially rose by 3 basis points before later declining.
According to Henry Allen, a strategist at Deutsche Bank, there has been a drastic change in market sentiment over the past 24 hours. Bond yields have seen a significant upsurge, while equities have faced losses. Allen attributes this shift to comments made by Bank of Japan officials, which have led investors to speculate about the potential end of the negative interest rate policy implemented by the BOJ.
The Japanese yen also experienced a surge, with a 1.8% jump against the dollar, reaching its strongest level in nearly four months.
In addition to these developments, investors are closely monitoring upcoming U.S. jobs data. The expectation is that further evidence of a cooling labor market will increase the likelihood of the Federal Reserve cutting rates next year.
Several economic updates are expected to be released on Thursday, including the October wholesale inventories at 10 a.m. and consumer credit for October at 3 p.m. Moreover, the weekly initial jobless claims report will be published at 8:30 Eastern on Thursday, followed by the nonfarm payrolls numbers on Friday.
Based on current market projections using the CME FedWatch tool, there is a 98% probability that the Federal Reserve will maintain interest rates at their current levels of 5.25% to 5.50% after the upcoming meeting on December 13th. Additionally, there is an 84% chance that rates will remain unchanged during the January meeting. However, market predictions indicate a 61% likelihood of a rate cut of at least 25 basis points during the subsequent meeting in March, which is a significant increase from 22% just a month ago.