JGBs sag as Fed signals faster pace of rate hike in 2017; 10-year yields highest since mid-February

The Japanese government bonds slumped Thursday after the Federal Reserve increased interest rates for the first time in 2016 and hinted at a faster hike in borrowing costs in 2017, majorly driven by increased inflation expectations and labour market tightening.

The benchmark 10-year bond yield, which moves inversely to its price, rose 2 basis points to 0.08 percent (highest since mid-February), the long-term 30-year bond yield bounced more than 1 basis points to 0.75 percent and the yield on short-term 2-year note climbed 1/2 basis point to -0.19 percent by 06:30 GMT.

The Federal Open Market Committee increased the fed funds rate to a 0.50-0.75 percent range, as widely expected. The statement noted that information received since the November meeting indicates that the labour market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year.

Also, the new projections showed that the central bankers expect three quarter-point rate increases in 2017, up from the two seen in the previous forecasts in September, based on median estimates.

Yesterday, the BoJ in its daily bond-buying operations purchased more of super-long bonds as compared to 190 billion yen on December 9. It purchased 120 billion yen of JGBs with over 25 years left to maturity. It also offered to buy 200 billion yen of JGBs with between 10 and 25 years left to maturity.

Lastly, the Bank of Japan’s last two-day monetary policy meeting will take place on December 19-20. We expect steady interest rate, while maintaining an asset-buying program of 80 trillion yen a month till second-quarter of 2017.

Meanwhile, the benchmark Nikkei 225 closed 0.10 percent higher at 19,273.79. While at 06:00 GMT, the FxWirePro's Hourly Japanese Yen Strength Index remained highly bearish for second straight day at -126.45 (lower than -75 represents bearish trend).