(Bloomberg) -- Japan’s government bond yields rose after Bank of Japan Governor Kazuo Ueda said interest rate hikes are “nearing” as economic trends develop in line with the central bank’s forecasts.
The two-year yield climbed to its highest since 2008 and the 10-year yield rose 2.5 basis points to 1.075%, after Ueda’s remarks in a Nikkei interview suggested a hike may happen soon. Overnight indexed swaps are pricing in a 60% chance of a December move, with the probability reaching almost 90% by January.
US Treasury yields rose along with JGB yields, with the 10-year up 5 basis points to 4.22%. Traders are also looking ahead to US nonfarm payrolls data later this week.
“Perhaps because the BOJ has been emphasizing the importance of communication in raising rates, the fact that Ueda’s interview appeared at this time may have been taken as a hint that rates would be raised in December,” wrote Ataru Okumura, senior rate strategist at SMBC Nikko Securities.
The possibility of a December hike in Japan as well as the US election results have recently lifted yields in both countries. Japan’s 30-year yield rose to its highest since 2010 last month, while five-year yields hit a 15-year high.
Ueda emphasized in the Nikkei interview that underlying inflation must rise toward 2%, and that the central bank should also keep an eye on the US economy given the incoming administration. He said the weakening yen may require “countermeasures” from the central bank.
Japan’s central bank has been criticized for its communication, particularly in the lead-up to its July 31 rate hike that set off global market turmoil in early August. Some strategists note that the latest interview may have been timed to prevent a repeat of a similar rout.
The yen weakened to 150.55 against the dollar at 3:17 p.m. in Tokyo, following broad dollar strength as US President-elect Donald Trump warned BRICS nations he would require commitments that they would not create a new currency and as he repeated threats to levy a 100% tariff.
Investors will be paying attention to a slew of US data in the coming week for further hints on monetary policy and the path of the dollar-yen.
“It’s a broad dollar bounce,” said Alvin Tan, head of Asia FX strategy at RBC Capital. “There’s also the fact that the market has fully priced in a BOJ rate hike by January, so Ueda’s comments were not that surprising in light of the market pricing.”
--With assistance from Masahiro Hidaka.
(Updates prices, adds comments, yen)
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