Japanese 10-year bonds climb on weak inflation expectations

The Japanese 10-year bonds climbed on Wednesday as lower inflation expectation increases the probability of further economic easing. The benchmark 10-year bonds yield, which is inversely proportional to the price of bonds, fell 6.35 pct to -0.067 pct and 3- year bonds yield dipped 2.69 pct to -0.229 pct at 6:45 GMT.

Yesterday, the BoJ Governor Kuroda expressed that the effect of negative interest rates is very strong so they would like to steadily proceed with easing policy and the timing of the next easing would be determined on the basis of risk factors affecting inflation. He further added that monetary easing tools would entail suitable combination of increased asset purchase, reducing interest rates deeper into negative zone, and purchase of risky assets.

JGB prices in the mid-day session ruled slightly higher, with 10-year to 20-year JGBs mostly unchanged from yesterday. JGBs in the 10-year to 20-year zone opened modestly firmer, with yields down by 0.5bp to 1bp from yesterday on a fall in US Treasury yields and stock prices overnight. But they pared most of their earlier gains in late morning trading on a rebound in crude oil prices and Tokyo stocks in the Asian trading session. JGBs in the 7-year and shorter zone remained firmer, as the BoJ offered to buy JPY350bn of JGBs in the 1-year to 3-year zone, JPY440bn of JGBs in the 3-year to 5-year JGB zone, and JPY450bn of JGBs in the 5-year to 10-year zone. The combination of zones and amounts was largely in line with market expectations.

Moreover, the BoJ's adoption of negative rates in January has driven JGB yields below zero, while also increasing its market volatility.

We expect an expansion of stimulus, and if the market happens to rule out any additional boost in stimulus, that would create an opportunity to go long and we also foresee that the 10-year note will yield about -0.15 percent at year-end.