JGB yields climb as oil prices stoke inflation worries

Japanese government bond (JGB) yields advanced on Wednesday, driven by a jump in crude oil prices that reinforced inflation worries, while market participants looked ahead to key US inflation data for clues on the interest rate path.

The benchmark 10-year JGB yield rose 1.5 basis points to 2.820%, reflecting an inverse relationship between bond prices and yields. The 5-year yield also climbed 1.5 basis points to a record high of 2.100%, while the 2-year yield, which is most sensitive to Bank of Japan policy expectations, increased 2 basis points to 1.63% — its highest level since May 1995.

Oil prices gained after Iran's top security official said the Strait of Hormuz would remain closed unless the US meets conditions including releasing frozen Iranian assets and ending regional conflicts. Both the US and Yemen's Houthi forces reported separate shipping attacks on Tuesday. Brent crude settled up 1.4% at $88.91 per barrel, while US crude rose 1.3% to $83.20.

According to Keisuke Tsuruta, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities, external conditions — including rising US long-term yields, higher oil futures, and a stronger dollar against the yen — are likely to act as a headwind for JGBs.

Investors are now focused on the US Consumer Price Index data due later on Wednesday, which could determine the direction of interest rates. Meanwhile, traders are increasingly pricing in the possibility of another Bank of Japan rate hike, with Tokyo Tanshi data showing a 66% probability of a move in September as of Monday afternoon.