Japan bond yields rise as US Treasury selloff persists

Japanese government bond yields rose on Thursday, tracking higher US Treasury yields overnight, as investors remained focused on inflation risks and the future pace of central bank rate rises. The benchmark 10-year JGB yield rose 5 basis points to 3.11%, with yields moving inversely to bond prices.

US Treasury yields rose overnight despite a softer Personal Consumption Expenditures price index reading for August, which tempered expectations for a Fed rate rise this month. Revised gross domestic product data and ADP employment data pointed to resilience in the US economy.

Further along the Japanese curve, the 20-year JGB yield climbed 4.5 basis points to 3.945% and the 30-year yield added 6 basis points to 4.2%. The 5-year yield rose 1 basis point to 2.385%, while the 2-year yield, the maturity most sensitive to Bank of Japan policy rates, fell 1 basis point to 1.94%, extending a decline from Wednesday after a modestly firm auction for the maturity eased investor concerns.

A quarterly Bank of Japan Tankan survey showed Japanese business confidence hit an eight-year high over July to September amid elevated inflation expectations, a result that supports the case for interest rate rises. A summary of opinions from the Bank of Japan's September meeting, at which policymakers raised borrowing costs by 25 basis points to a 31-year high, showed some members saw a need to accelerate the pace of tightening or move rates closer to the central bank's desired level sooner. A Cabinet Office representative at the meeting cautioned about the potential economic impact of higher borrowing costs and urged caution over further increases.

Ryutaro Kimura, a senior fixed-income strategist at BNP Paribas Asset Management, said such comments could be read by markets as a sign the Bank of Japan may be slow to act to rein in inflation. "If political pressure were to put the brakes on the necessary pace of rate hikes, let alone consecutive hikes, that would add upward pressure on longer-term interest rates through higher inflation-risk premiums," Kimura said.