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Rangebound trading likely to persist with no definitive catalysts for Fed rate cut or BoJ rate hike
Long-term and super-long-term JGB yield scenario for November 10-14
We expect the 10-year JGB yield to trade sideways this week. With an absence of definitive catalysts making it difficult to gauge the timing of the next moves by the Fed and BoJ, we see little likelihood of a significant breakout from the recent trading range.
The US government shutdown has halted public-sector data releases, forcing the market to turn to private-sector indicators. Last week, the ADP employment report(Nov 5) showed stronger-than-expected October growth in private-sector payrolls, while Challenger’s October job-cut report (Nov 6) reignited concerns about labor market weakness by showing layoffs jumping to three times the year-before level. Real economy impacts are gradually intensifying as federal employee salaries remain unpaid due to the shutdown. Against this backdrop, the Treasury market is looking ahead to a December Fed rate cut (the third in a row), with the 10-yearUST yield potentially retesting sub-4% territory. We think rising downside risks to the US economy would dampen expectations for an early BoJ rate hike, while an end to the government shutdown would ease uncertainty and could prompt a temporary rebound in the 10-year UST and JGB yields.
The BoJ will release the Summary of Opinions for its October Monetary Policy Meeting on November 10, with Policy Board member Junko Nakagawa scheduled to deliver a speech in Okayama the same day. At the October meeting, the Board voted 7-2 to leave monetary policy on hold, and the focus now is on determining what data or information Ms. Nakagawa and other members of the majority deem necessary for a rate hike. Last week also brought a report claiming the BoJ has begun serious discussions on raising the policy rate to 0.75% (Jiji Press). The market is likely to focus on the response to this news (or the lack thereof) from the government and ruling coalition. The timing of the yet-to-be-held meeting between Prime Minister Sanae Takaichi and BoJ Governor Kazuo Ueda is also a key point of interest. With the market currently pricing in only a 50% or so chance of a December rate hike, any statement from a government official endorsing a rate hike would boost expectations of a hike by the end of the year, potentially prompting the 10-year JGB yield to test the 1.7% level. Conversely, cautious remarks would probably keep the 10-year yield hovering in the mid-1.6% area.
We see developments in super-long JGB yields hinging on the outcome of the 30-year offering on November 11. The 30-year yield, which surged above 3.3%immediately after the LDP leadership election, has since declined to around 3.05%.Concerns over fiscal expansion have eased, making the impact of the Ministry of Finance’s reductions in issuance more apparent. A strong auction result could prompt the 30-year yield to test the downside with an eye on the key psychological threshold of 3%. Even if insufficient demand results in a tailing auction, dip-buying demand from investors who were unable to chase yields lower should provide support. This week we expect the yield curve to undergo a modest bull steepening if aggravated US slowdown concerns undermine expectations of a BoJ rate hike in December or January. We project a bull flattening if the 30-year JGB auction ends with strong results, while a brief bear steepening is more likely if the results are soft.