JGBs rise modestly following overnight gains in U.S. Treasuries; month-end BoJ decision in focus

The Japanese government bonds traded modestly firmer Friday following an overnight rally in U.S. government bonds.

The benchmark 10-year bond yield, which moves inversely to its price, fell 1 basis point to 0.05 percent, the long-term 30-year bond yields dipped 1-1/2 basis points to 0.74 percent and the yield on short-term 2-year note slid 1 basis point to -0.20 percent by 06:30 GMT.

The JGBs bonds have been closely following developments in oil markets because of their impact on inflation expectations (which are well below the Reserve Bank of New Zealand's target) and the U.S. debt market. The benchmark 10-year bond yields fell 28 basis points to 2.36 percent in just three weeks.

Crude oil prices declined after a surprisingly large increase in U.S. inventories of gasoline and distillates. The International benchmark Brent futures fell 0.11 percent to $56.81 and West Texas Intermediate (WTI) dipped 0.09 percent to $53.71 by 05:20 GMT.

Minutes from the 13 - 14 December FOMC meeting indicated that most participants judged that a gradual pace of rate increases was likely to be appropriate to promote the Committee's objectives of maximum employment and 2 percent inflation (currently expected to be roughly 75 basis points of tightening over the course of 2017).

A gradual pace was also viewed by some participants as likely to be warranted because the proximity of the federal funds rate to the effective lower bound placed constraints on the ability of monetary policy to respond to adverse shocks to the aggregate demand for goods and services.

However, while viewing a gradual approach to policy firming as likely to be appropriate, participants emphasised the need to adjust the policy path as economic conditions evolved. They pointed to a number of risks that, if realised, might call for a different path of policy than they currently expected (highlighting increased uncertainty regarding fiscal and other economic policies). As to be expected policymakers are likely to maintain current views until further details surrounding fiscal policy are revealed.

Also, the BOJ purchased 410 billion yen of JGBs on Friday with maturities ranging from five years to 10 years as a part of its regular bond-purchasing operation.

Lastly, the BoJ’s first two-day monetary policy meeting for 2017 will take place on January 30-31. We foresee that the central will remain committed to holding its 10-year JGB yields near zero, while keeping interest rate steady at -0.10 percent.

Meanwhile, the benchmark Nikkei 225 ended 0.34 percent lower 19,454.33. While at 06:00 GMT, the FxWirePro's Hourly Japanese Yen Strength Index remained highly bullish at +107.49 (higher than +75 represent a pure bullish trend).