JGBs sag on higher risk appetite; next week’s FOMC decision in focus

The Japanese government bonds were pushed lower across the curve Friday as investors moved away from safe-haven buying amid gains in riskier assets including crude oil and stocks.

Also, markets will remain focused on the Federal Reserve last monetary policy decision for 2016, which is scheduled to be released on December 14. The benchmark 10-year bond witnessed a heavy sell-off, pushing yields by 5 basis points to 2.43 percent.

The benchmark 10-year bond yield, which moves inversely to its price, rose 1 basis point to 0.058 percent, the yield on long-term 30-year note jumped 14 basis points to 0.70 percent and the yield on short-term 3-year note climbed 1/2 basis point to -0.18 percent by 05:40 GMT.

The Federal Reserve is expected to increase the target range of the key interest rate by 25 basis points to 0.50 percent to 0.75 percent, with a unanimous decision. Little change to the statement, though the Committee is likely to acknowledge that market-based measures of inflation compensation have risen further.

We expect the Fed to raise policy rates by 0.25 percent at its policy meeting on 14th December. Such an outcome is unlikely to have much impact as it is already fully discounted in markets. Of more interest now will be what guidance the Fed provides on its intentions for next year. The Fed’s current guidance is relatively cautious with the ‘dot plot’ pointing to two rate hikes in 2017, said Lloyds Bank in its research note.

With the economy seemingly close to ‘full employment’ there is a now a case for more hawkish guidance. The sell-off in US Treasuries reflects concerns looser fiscal policy may cause the Fed to move more aggressively. For now, the Fed will probably not change its rhetoric, while it waits to see what fiscal policy measures are enacted, they added.

Moreover, crude oil prices rose ahead of OPEC and non-OPEC meeting on Saturday. The International benchmark Brent futures climbed 0.5 percent to $54.12 and West Texas Intermediate (WTI) jumped 0.73 percent to $51.21 by 05:40 GMT.

On Thursday, gross domestic product (GDP) in Japan during the third-quarter of this year declined unexpectedly, following drops in business spending and in private inventories. Japan unexpectedly cut its reading of third-quarter economic growth to an annualised 1.3 percent, from a preliminary estimate of 2.2 percent expansion, data released by the country’s Cabinet Office showed Thursday. The median estimate of economists in a Bloomberg survey was for an annualised 2.3 percent expansion.

Meanwhile, the benchmark Nikkei 225 traded 1.38 percent higher at 19,010.50. While at 07:00 GMT, the FxWirePro's Hourly Japanese Yen Strength Index remained highly bearish for second straight day at -104.97 (lower than -75 represents bearish trend).