Investors have increased their bets on the Bank of Japan raising interest rates before the end of July. Previously, the Bank of Japan unexpectedly reduced the scale of bond purchases during this week's routine operations.
The Zhitong Finance App learned that investors have increased their bets on the Bank of Japan's interest rate hike before the end of July. Previously, the Bank of Japan unexpectedly reduced the scale of bond purchases during this week's routine operations.
Overnight index swaps show that the Bank of Japan is likely to raise the benchmark interest rate by about 70% at that time, up from about 50% earlier this month.
The shift in market positions comes at a time when the yen is facing downward pressure. This is due to the huge gap between Japan's low interest rates and America's high borrowing costs. More and more people also expect that before the July rate hike, the Bank of Japan may announce a wider reduction in bond purchases at the June meeting.
The yen remained stable on Wednesday, while the trend of Japanese bonds was moderate. The yield on 20-year and 30-year bonds recently climbed to the highest level in ten years. The yield on the benchmark 10-year treasury bond was close to 0.975%, the highest level since 2013.
Christopher Willcox, head of Nomura's trading department, said in an interview on Wednesday that 10-year bond yields “may exceed 1% at some point” because inflation is likely to remain high.
“There is no doubt that these markets will become more interesting,” he said.
Willcox added that the yen is still likely to rise to 140 against the US dollar this year, and it is expected that the Bank of Japan may announce a “limited austerity policy” in October. As of press time, the yen traded around 156.39 against the US dollar.
Divergent opinions
However, investors are divided on the outlook for July and beyond.
According to a market indicator, traders expect the Bank of Japan to raise interest rates again this year in addition to the March rate hike.
However, Pacific Investment Management expects to raise interest rates three more times this year; Ales Koutny, head of international interest rates at Vanguard Group Inc., predicts that interest rates will rise to around 0.75% by the end of this year; Goldman Sachs expects the Bank of Japan to raise interest rates twice a year until interest rates reach 1.25% to 1.5%.
Some investors believe that the Bank of Japan will not raise interest rates drastically because companies accustomed to ultra-low borrowing costs will cut spending. Others believe that ignoring interest rate hikes may cause the yen to weaken further, thereby driving up import costs.
Tadashi Matsukawa, head of the fixed income management department of PineBridge Investments Japan Co. in Tokyo, said that if the Bank of Japan raises interest rates twice a year, the yield on medium-term bonds, especially five-year bonds, will be affected.