JGB Market Stabilizes After 'Truss Moment' Scare, But Rate Hike Bets Surge

The Japanese Government Bond (JGB) market is recovering from a historic sell-off that sent tremors through global fixed-income desks. Triggered by fiscal expansion fears and shifting Bank of Japan (BOJ) policy, the 40-year JGB yield briefly breached 4.2%, marking its highest level in nearly two decades.

Institutional Circuit Breakers

The rout was stemmed as Sumitomo Mitsui Financial Group (SMFG) announced plans to double its domestic bond portfolio. Arihiro Nagata, SMFGs head of global markets, noted that compared to foreign bonds, JGBs offer a superior risk-reward profile at these levels, signaling a significant repatriation of capital by Japanese megabanks.

Key Market Data

• Yield Spike: 40-year JGB yield touched 4.2%.
• Forecast: Strategists predict up to three rate hikes by the BOJ this year.
• Currency risk: Potential violent reversal in USD/JPY if policy divergence narrows.

The BOJ's Dilemma

Market dislocation has altered the Bank of Japan's path. The sharp depreciation of the Yen—exacerbated by US economic strength—is forcing the BOJ into a corner, necessitating defensive hikes.

If the US Federal Reserve cuts rates while the BOJ tightens, the narrowing yield differential could trigger a reversal in USD/JPY. Conversely, unanchored Japanese yields could push US Treasury yields higher as Japanese investors offload US treasuries to cover domestic margin calls.