Download App

[Japanese Bond Curve Flattens Unusually After Bear Steepening, Market Already Prepared for April Rate Hike] ⑴ Japanese government bonds gave back some of the previous day's gains on Thursday. The US-Iran ceasefire agreement appeared fragile due to Israel's continued airstrikes on Lebanon, coupled with news that passage through the Strait of Hormuz had not yet resumed. Futures opened down 20 basis points to 130.17. ⑵ The yield curve briefly steepened during the session, with the 10-year yield touching 2.40%, the 20-year yield climbing 4.5 basis points to 3.305%, and the 30-year yield jumping 6 basis points to 3.655%. ⑶ The Japanese Ministry of Finance auctioned new five-year bonds with a coupon rate of 1.8% on the same day. The closing rate was 1.835%, with a slight extension of 0.9 basis points at the end. The bid-to-cover ratio of 3.58 times, while lower than the previous 3.69 times, was still higher than the average of 3.34 times over the past six auctions, indicating that investors still had a willingness to buy on dips. (4) Bank of Japan Governor Kazuo Ueda stated in parliament that short- and medium-term real interest rates are clearly negative, but whether his statement was intended to emphasize the continued support of loose monetary policy or to hint at a faster return to neutral interest rates remains unclear, leading to a muted reaction in the bond market. (5) In the final trading session, yields on 30-year and 40-year ultra-long-term bonds all fell back to near the previous day's closing levels, flattening the yield curve. Short- to medium-term bonds saw some support from domestic buying. (6) A trader at a Japanese brokerage pointed out that strong front-end demand indicates the market has largely priced in an April rate hike. Even if the Bank of Japan does act this month, it is unlikely to have a significant impact on the bond market. A post-hike policy rate is expected to enter a period of observation, which may actually stimulate buying. (7) Analysts believe that the Japanese bond market's sensitivity to geopolitical risks is diminishing. Investors' focus has shifted from the Hormuz situation to the Bank of Japan's April monetary policy meeting. If Kazuo Ueda chooses to remain on hold, it could trigger a sharp correction in front-end pricing of the yield curve.