JGBs trade mixed on hawkish Fed policymakers’ comments; BoJ easing hopes strengthen

12 September 2016, 11:15
Eko Rediantoro

The Japanese government bond traded mixed Monday, following hawkish comments made by the United States Federal Reserve policymakers. On the contrary, bonds prices saw upward pressure at the short-end of the curve as investors speculate that the Bank of Japan will lower its key interest rate further into negative territory.

The benchmark 10-year bond yield, which moves inversely to its price, remained steady at -0.013 percent, the super-long 30-year JGB yield climbed 4-1/2 basis points to 0.560 percent and the short-term 2-year JGB yield slid 5 basis point to -0.247 percent by 06:30 GMT.

The United States Federal Reserve rate hike speculation gathered steam following hawkish comments from the Fed policymakers. Also, Bloomberg’s implied portability for a rate hike increased to 30 percent for the September policy meeting, up from 25 percent calculated at the end of last week.

Moreover, the Boston Federal Reserve President Eric Rosengren (a voter in 2016) said that he sees a reasonable case for gradual rate increases and a failure to continue the path of gradual rate normalisation could shorten the recovery; history shows the difficulty of slowing the economy after waiting too long to tighten policy.

He further added that payrolls growth has been somewhat choppy of late, but the United States economy is performing quite well, has proven resilient to international risks, and is at/close to full employment.

Additionally, Fed Governor Daniel Tarullo, speaking on CNBC, said that he will comment on the timing of Fed rate increases, but wouldnt foreclose the possibility of a rise this year. Also, would want evidence that inflation will rise and can be sustained at 2 percent and answer to low-rate risks isnt necessary to hike. On balance his remarks seem to be on the side of holding off from tightening policy.

In addition, Dallas Fed President Robert Steven Kaplan said that the case for a rate hike has strengthened in the last few months, but the Fed can afford to be patient because neutral rates are low. He further added that low rates create distortions/imbalances and the Fed will debate this over the next few months. The ISM reports a little more negative than expected and does not think the economy is overheating, he added.

According to a Reuters story, the BoJ is considering options to steepen the JGB yield curve, including adjusting its bond purchases or clarifying forward guidance on policy.

Last week’s, Japan’s second quarter final seasonally adjusted GDP rose 0.2 percent q/q (consensus was for zero), which is an upward revision from the previous reading of 0.0 percent, though down from 0.5 percent in the first quarter of 2016.

On an annualised basis growth was 0.7 percent y/y, higher than the market expectations of 0.2 percent y/y growth, from previous 0.8 percent. The better GDP somewhat reduces the probability of further BOJ easing measures, but do note that inflation is still way below target. The next Bank of Japan meeting is September 20-21; our bias is for a 10 basis point rate cut.

The Bank of Japan will hold its two-day monetary policy meeting on 20-21 September, announcing its decision on Wednesday, 21 September is a close call. But, we foresee that the BoJs 9-member policy board is likely to cut rates on excess reserves and expand its monetary base as stagnant growth and continued risk of deflation will weigh on BoJ Governor Kuroda’s decision.

According to recent Reuters poll, 60 percent of economists see the Bank of Japan easing in September 21; 40 percent see them stay unchanged. Pollsters are split on possible policy action and over 50 percent said the BoJ will adopt more flexible wording on inflation targeting.

Meanwhile, the benchmark Nikkei 225 closed down 1.73 percent at 16,672.92 and the broader Topix index also closed 1.54 percent lower to 1,323.10 points.

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