New Normal for JGBs

UBS has revised its 10-year JGB yield forecast to 2.7% as the market adjusts to a 1.5% terminal policy rate and persistent inflation. While yields may temporarily touch 3%, structural factors are expected to contain long-term rises below that threshold.

Key Takeaways

• 1.JGB yields have entered a 'new normal' with the 10-year yield reaching multi-decade highs, likely settling around 2.7%.
• 2.The rise in yields is driven primarily by higher market inflation expectations and the Bank of Japan's terminal rate pricing of 1.5%.
• 3.Japanese banks are the primary beneficiaries of interest rate normalization, with potential net profit increases of up to 20%.

Table of Contents

• New normal for JGB yields, driven by inflation expectations and normalizing monetary policy
• Five FAQs on JGBs
• 1. What is driving the rise in yields?
• 2. Could the 10-year JGB yield exceed 3%?
• 3. Where will yields ultimately settle?
• Domestic inflationary pressures likely remain moderate
• Risk of higher terminal rate could drive yields above 3%
• 4. Will there be policy intervention against rising yields?
• 5. Will rising yields cause spillover effects?
• Banks: Primary beneficiaries of policy rate normalization
• Life insurers: Gradual earnings benefits from higher investment yields
• Capital flows: Hinge on 3% yield threshold and policy response
• Asset class implications: Japanese equities: AI-led rally supported by earnings momentum
• JGBs: Likely to remain elevated amid reflation and policy normalization
• JPY: Yen recovery hinges on stabilization of inflation expectations

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