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How long will JGB buybacks continue in wake of recent events?
Long-term and super-long-term JGB yield scenario for August 4-8
The 10-year JGB yield is expected to test the downside this week following recent events but is likely to find support around the key 1.50% level. To briefly recap recent developments, bond yields rose in the week of July 22–25 after the ruling coalition lost its majority in the Upper House election and the US-Japan trade agreement was announced. The advance came to an end last week as buybacks sent yields lower. Prime Minister Shigeru Ishiba has repeatedly expressed his intention to remain in office since the Upper House election, and while pressure for his resignation is growing within the LDP, we think it will take a little longer before we have a clearer picture of the domestic political situation. Overseas short-term players who had been shorting the super-long sector on concerns about expansionary fiscal policy may have started to unwind their positions ahead of the summer holidays.
The announcement of a US-Japan trade agreement boosted expectations for a BoJ rate hike by the end of the year, but there is a sense that all the news is out for now. The Outlook Report released on July 31 contained several indications that the Bank may be preparing to resume rate hikes. However, Governor Kazuo Ueda’s cautious stance on an early rate hike at his press conference that day prompted buybacks in the short- and medium-term sectors. We think investors who had been holding off are likely to engage in tentative buying now that the market has digested the Upper House election results and tariff agreement (two weeks ago) as well as the outcomes of the FOMC and BoJ meetings (last week).
However, bond yields have declined significantly from their recent highs and maybe insufficient to attract bidders at the 10-year JGB auction on August 5 and the30-year offering on August 7. Additionally, voices calling for Prime Minister Ishiba to take responsibility for the election defeat may intensify at the joint meeting of LDP lawmakers on August 8, potentially rekindling speculation about his resignation. We think fiscal concerns would resurface if expectations for an early LDP leadership election picked up. The Summary of Opinions for the July 30-31 Monetary Policy Meeting will also be released on August 8. There have been instances in the past where Governor Ueda’s press conference leaned dovish while the Summary of Opinions was more hawkish in tone. If the Summary reveals confidence in the "the mechanism in which wages and prices rise moderately in interaction with each other," it could help to curb further declines in bond yields