JGB Yields Climb Toward Multi-Decade Highs on Inflation, BOJ Tightening Bets

Japanese government bonds came under selling pressure on Monday, pushing yields back toward multi-decade highs as inflation concerns and expectations of further central bank tightening weighed on the market.

The benchmark 10-year JGB yield rose 2 basis points to 3.095%, on track for its highest close since August 1996. The 2-year yield, which is most sensitive to Bank of Japan policy rates, added 1.5 basis points to 1.950%, matching a 31-year peak reached last week. The 30-year yield edged up 1 basis point to 4.165%.

The moves followed data showing a key gauge of service-sector inflation accelerated in August at its fastest annual pace in more than two years, underscoring price pressures that could justify additional interest rate increases.

Minutes from the BOJ's July policy meeting, released on Monday, showed board members emphasizing the need to focus on inflation, with some calling for faster rate hikes. The central bank this month raised its key rate to 1.25%, a 31-year high.

"Given that major developed economies share factors that fuel inflation, such as fiscal expansion and high commodity prices, it's possible that expectations will grow that the Bank of Japan will eventually be required to tighten monetary policy as well," Ataru Okumura, a senior rate strategist at SMBC Nikko Securities, said in a note.

Investors are also looking ahead to auctions of 40-year and 2-year JGBs on Tuesday and Wednesday. The Ministry of Finance was due to hold a regular meeting with primary dealers on Monday afternoon, where officials may discuss reducing issuance in liquidity enhancement auctions for 5-to-11-year bonds.

"Attention is focused on whether such reductions will occur, and if so, their scale and the instruments to be used to offset them," Takuya Onizawa, a fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities, said in a note.