Long-term JGBs trade lower after Yellen signals approaching rate hike

The long-term Japanese government bonds traded lower Monday after the Federal Reserve Chair Janet Yellen at the annual Jackson Hole Symposium signalled that the possibilities of increasing policy rates have strengthened in recent months. However, weakness in crude oil prices limited the growth in bond yields across the curve.

The benchmark 10-year bond yield, which moves inversely to its price, rose 1 basis point to -0.061 percent, the super-long 30-year JGB yield also jumped 3 basis points to 0.381 percent and the short-term 2-year JGB yield remained steady at -0.177 percent by 06:20 GMT.

At the Jackson Hole Symposium, Yellen said that the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives. She said that in light of the continued solid performance of the labour market and the Fed’s outlook for economic activity and inflation the case for an increase in the federal funds rate has strengthened in recent months. However, Yellen furthered that of course, the Fed’s decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook.

Moreover, the Japanese bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Japan's target.

Crude oil prices declined more than 1 percent at the start of the week as Iran said it would only cooperate in talks to freeze output if other exporters recognized its right to full regain market share. Also, data showed that Iraq is producing 3.205 million barrel per day in August compared to 3.202 million barrel per day in July. The International benchmark Brent futures fell 1.26 percent to $49.52 and West Texas Intermediate (WTI) dipped 1.39 percent to $46.98 by 06:20 GMT.

According to Reuters, the BoJ offered to buy JGBs, contrary to expectations of some market expectations. The BoJ bought 820 billion yen of 1-year to 5-year JGBs and 320 billion yen of super-long JGBs under its massive JGB purchase program.

According to recent Reuters poll, 60 percent of economists see the Bank of Japan easing in September; 40 percent see them stay unchanged. Pollsters are split on possible policy action and over 50 percent said the BoJ will adopt more flexible wording on inflation targeting.

Lastly, investors will remain keen to focus on the upcoming economic data, highlighted by jobless rate, retail sales, industrial output, followed by 10-year bonds auction.

Meanwhile, the benchmark Nikkei 225 closed up 2.30 percent at 16,737.49 and the broader Topix index also closed 1.97 percent higher to 1,313.24 points.