Japanese govt bond yields decline as US treasury yields slide following Powell's rate cut signals

JGB yields: Japanese government bond (JGB) yields edged lower on Monday, following a similar decline in US Treasury yields after Federal Reserve Chair Jerome Powell indicated that a rate cut is likely at the central bank's next policy meeting in September.

US Treasury yields, which JGB yields typically track, dropped on Friday after Powell delivered his strongest indication yet that interest rates would be reduced soon. This movement in US yields pushed JGB yields lower across the curve, with the benchmark 10-year JGB yield dipping 1.5 basis points (bps) to 0.875 per cent.

In response, 10-year JGB futures rose 0.17 yen to 144.81 yen, reflecting the market's reaction to the dovish tone from the Federal Reserve.

However, Ryutaro Kimura, a fixed income strategist at AXA Investment Managers, cautioned that stronger-than-expected US labour data or a shift in market expectations toward a slower pace of rate cuts could reverse the decline in US Treasury yields. This, in turn, could apply upward pressure on JGB yields.

"Current short-term US interest rates appear to be pricing in a faster rate cut than what the Federal Reserve might have in mind," Kimura noted.

Monday's drop in JGB yields partially reversed the gains seen in the previous session. Bank of Japan (BOJ) Governor Kazuo Ueda, in his remarks before Japan's parliament on Friday, signaled a continued readiness to tighten policy if inflation and economic growth remain on target.

The BOJ's decision to raise rates in July was a contributing factor to the sharp decline in the Japanese stock market earlier this month. Additionally, yields had fallen significantly in early August, forcing many hedge funds with short positions to retreat. According to Kimura, there will likely be less upward pressure on yields until those market participants re-enter the scene.

Elsewhere on the yield curve, the 20-year JGB yield decreased by 1 bp to 1.69 per cent, and the 30-year JGB yield fell by 1 bp to 2.07 per cent. The two-year JGB yield also ticked down by 0.5 bp to 0.36 per cent.