Strategy Weekly: Recent Rise in Yen Rates Defies Clean Explanation

JGB yields recently surged with the 10y briefly exceeding 2.8%, a move Mizuho attributes to a seasonal 'vicious cycle' of weak supply and demand in May rather than fundamental inflation shifts. The firm expects the upswing to wind down as the current heavy auction schedule concludes.

Key Takeaways

• 1.The recent surge in 10y JGB yields above 2.8% was largely driven by a 'vicious cycle' of weak supply/demand in May rather than purely fundamental macro shifts.
• 2.Japanese long-term rates appear to have already priced in a high inflation outlook compared to US and Eurozone growth/inflation spreads.
• 3.A projected JPY 3 trillion supplementary budget is considered too small to threaten fiscal sustainability or significantly increase market JGB issuance.

Table of Contents

• (1) Recent rise in yen rates defies clean explanation
• IS (WAS) MARKET NOT PRICING IN PROLONGED INFLATION?
• FISCAL DEVELOPMENTS: SUPPLEMENTARY BUDGET UNLIKELY TO RESULT IN HIGHER CALENDAR-BASE JGB ISSUANCE
• RISE IN YEN RATES DEFIES CLEAN EXPLANATION
• DEVELOPMENTS THIS WEEK AND IMPLICATIONS FOR RATES OUTLOOK
• SHORT-TERM OUTLOOK (ONE WEEK – ONE MONTH)
• MEDIUM-TERM OUTLOOK (SEVERAL MONTHS – ONE YEAR)
• Risk scenarios
• (2) Envisaged timetable for BOJ JGB-buying operations
• (3) Yen rates relative value and investment strategies
• RELATIVE VALUE SCORE TABLES

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