Treasury yields ease after PPI print as a September rate hold looks likely

Japanese government bond yields remained stable on Thursday, with the five-year bond yield hovering near a record high, as investors anticipate the Bank of Japan's upcoming September rate hike. The five-year yield remained unchanged at 2.105%, having surged to a record high of 2.12% the day before. The two-year yield, which is most sensitive to Bank of Japan policy rates, remained flat at 1.64%, the highest level since May 1999.

Bond yields and prices have an inverse relationship. Shuichi Ohsaki, a senior portfolio manager at Meiji Yasuda Asset Management, noted that the weakening yen against the dollar has bolstered confidence in the market's expectation of a rate hike in September. Ohsaki further explained that the market now focuses on the pace of the Bank of Japan's rate hikes rather than the final terminal rate, with the September hike expected to follow a June increase, occurring every three months.

The anticipation of a September rate hike intensified following a joint currency intervention between Japan and the United States at the end of the previous month, which bolstered the yen's value and increased the likelihood that the Bank of Japan would raise rates soon to maintain the yen's strength. The probability of the Bank of Japan raising rates by 25 basis points to 1.25% in its October policy meeting stands at 95%, while swap rates suggest a 50% chance of another hike to 1.5% at the December meeting.

Meanwhile, the 10-year JGB yield increased by 2 basis points to 2.87%, and the 30-year yield rose by 1 basis point to 4.000%, reflecting concerns over Japan's fiscal health. Ohsaki mentioned that the yen's potential strengthening despite a Bank of Japan rate hike in September is unlikely, as investors remain apprehensive about government spending, including a massive stimulus plan and food tax cuts. The 20- and 40-year bonds did not see any trading activity as of 0445 GMT.