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10-year JGB yield seen taking on downward bias as supply/demand concerns ease up in super-long sector
Long-term and super-long-term JGB yield scenario for June 9-13
We expect the 10-year JGB yield to trade back and forth with a downward bias inthe 1.4% range this week. Supply/demand concerns eased somewhat last weekafter the 10- and 30-year offerings1went smoothly amid mounting expectations ofa reduction in super-long JGB issuance. The drop in the 10-year UST yield below4.4% also helped stabilize Japan’s benchmark long-term yield. If the May US jobs report (Jun 6) comes in weaker than expected, a decline in the 10-year UST yield is likely to nudge its Japanese equivalent lower. But if US labor market conditions are stronger than anticipated, an increase in the 10-year UST yield could cause the10-year JGB yield to reverse higher. We think the latter would be more responsive to a drop in US yields than to an increase now that supply/demand conditions in the super-long sector have stabilized somewhat.
Graph 1 illustrates the correlation between the 10-year JGB yield and 2-year-forward 1-month (TONA-based) OIS rates. Graph 2 shows the Bloomberg JGB Liquidity Index. Since the reciprocal tariff shock on April 2, the 10-year JGB yield has been trading higher than the estimate derived from forward rates (which was1.334% as of June 5; see Graph 1). We suspect the tariff shock prompted a loss of liquidity in the JGB market (Graph 2), with a widening risk premium putting additional upward pressure on the 10-year yield. More recently, however, liquidity has stopped declining, and the upward deviation of the 10-year yield from the regression line has shrunk. While we need to keep an eye on headline risk from statements by US President Donald Trump along with the outcome of the US-Japan trade talks, we see room for the 10-year JGB yield to move a little closer to the regression line barring some new negative surprise.
This week we expect to see more interest in news reports speculating about the upcoming Monetary Policy Meeting on June 16-17. On June 4, Reuters reported that the BoJ was considering slowing the pace of reductions in its bond purchases from FY26 onward. While it said that Bank officials have yet to come to an agreement, we suspect that easing up on the pace of additional cuts is probably one option being discussed. Even if the BoJ continues tapering its purchases inFY26 and beyond, a downsizing of the reductions in its monthly purchases from the current JPY400 billion each quarter to, say, JPY300 billion or JPY200 billion would probably serve as a psychological buffer to ease concerns about future difficulties in absorbing debt issuance.
