Global Market: Japanese bond yields hold near highs as markets brace for BOJ rate hike

Japanese government bond yields were largely unchanged on Thursday, with the five-year yield hovering near a record high as investors positioned for a potential Bank of Japan rate hike in September, according to a report by Reuters.

The five-year JGB yield was flat at 2.105%, after touching a record 2.12% in the previous session. The two-year yield, which is particularly sensitive to expectations for Bank of Japan policy rates, was also unchanged at 1.64%, its highest level since May 1999.

According to Reuters, market expectations for further monetary tightening have strengthened as the yen has weakened against the U.S. dollar in recent sessions. Investors are increasingly focused not only on the timing of the next rate increase but also on the pace of subsequent hikes.

Expectations for a September rate increase have gained momentum following a joint currency intervention by Japan and the United States at the end of last month. The move boosted the yen and increased expectations that the Bank of Japan could raise interest rates to support the currency and contain inflationary pressures.

Market pricing indicates a 95% probability that the BOJ will raise its policy rate by 25 basis points to 1.25% by its October policy meeting. Swap rates also point to roughly a 50% probability of another increase to 1.5% at the December meeting, Reuters reported.

Longer-dated bond yields also moved higher. The 10-year JGB yield increased 2 basis points to 2.87%, while the 30-year yield rose 1 basis point to 4.00%.

The rise in longer-term yields reflects growing concerns over Japan's fiscal position, including expectations of increased government spending. Reuters reported that market participants remain cautious about the potential impact of a large fiscal stimulus package and proposed food tax cuts on government finances and bond markets.

The yen's future direction remains another key consideration for investors. Even if the BOJ raises rates in September, concerns over government spending could limit the currency's ability to strengthen, the report stated.

Trading in the 20-year and 40-year JGBs had yet to take place as of 0445 GMT.