Bond Report: Treasury yields rise as inflation data looms, as Japanese yields reach highest since 2014

Bond yields rose Monday after the Bank of Japan hinted of an end to negative interest rates and traders eyed crucial U.S. data later in the week.

What’s happening

The yield on the 2-year Treasury BX:TMUBMUSD02Y added 1.3 basis points to 4.986%. Yields move in the opposite direction to prices.
The yield on the 10-year Treasury BX:TMUBMUSD10Y rose 1.5 basis points to 4.286%.
The yield on the 30-year Treasury BX:TMUBMUSD30Y climbed 3 basis points to 4.369%.

What’s driving markets

Government bond yields are mostly higher Monday after the Bank of Japan suggested it may soon end its negative interest rate stance.

Ten-year JGB yields BX:TMBMKJP-10Y rose above 0.7% to their highest since 2014, nudging up equivalent duration U.S. and European yields, after Bank of Japan Governor Kazuo Ueda told the Yomiuri newspaper in an interview over the weekend that by the end of 2023, the central bank should have an idea about whether its decade of easy monetary policy can come to an end.

“Once we’re convinced Japan will see sustained rises in inflation accompanied by wage growth, there are various options we can take,” Ueda reportedly said. “If we judge that Japan can achieve its inflation target even after ending negative rates, we’ll do so.”

Investors were also contemplating the prospects for U.S. monetary policy ahead of consumer prices data due Wednesday, and a retail sales report on Thursday that may color the thinking of the Federal Reserve ahead of its rate-setting meeting next week.

Markets are pricing in a 93% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on September 20, according to the CME FedWatch tool.

The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in November is priced at 39%.

The central bank is not expected to take its Fed funds rate target back down to around 5% until July 2024, according to 30-day Fed Funds futures.

What are analysts saying

“If last week was a bit light on important data, you can’t say the same about this week’s high-impact extravaganza that will occur in a Fed blackout period as next week’s FOMC lurks in the wings,” said Jim Reid, strategist at Deutsche Bank.

“U.S. CPI (Wednesday) will be the obvious standout but U.S. PPI and retail sales (Thursday) are nearly as important given how some of the PPI subcomponents feed into the Fed’s preferred core PCE, and for retail sales, we’ll see how much momentum has been lost after a phenomenally strong July print,” Reid added.