JGBs slump across the curve as firm energy prices lift inflation expectations

The Japanese government bonds slumped Thursday as investors moved away from the safe-haven buying amid rising crude oil prices that lifted inflation expectations.

The benchmark 10-year bond yield, which moves inversely to its price, rose 2 basis points to 0.03 percent, the yield on long-term 30-year note also climbed 2 basis points to 0.59 percent and the yield on short-term 2-year note bounced 1/2 basis point to -0.15 percent by 05:30 GMT.

The JGBs have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Japan's target. Crude oil prices rallied after OPEC agreed to output cuts in OPEC ministerial gathering at Vienna yesterday. The International benchmark Brent futures rose 1.10 percent to $52.41 and West Texas Intermediate (WTI) jumped 1.05 percent to $49.96 by 05:30 GMT.

The Organization of the Petroleum Exporting Countries (OPEC) has agreed to cut production by roughly 1.2 mb/d to 32.5, which equates to a 4.5-4.6 percent cut per member country. We believe the outcome is consistent with our view of what OPEC production levels were expected to be in 2017 irrespective of the deal reached yesterday, reported Barclays in its research note.

In other words, the meeting is highly unlikely to substantially affect the oil market balance.  Compared with our assessment of OPEC supply last month, we have adjusted our first-quarter of 2017 production estimate lower by 350 kb/d, which will result in a slightly steeper draw than our balances were forecasting, they added.

Moreover, Bank of Japan board member Makoto Sakurai said in a speech to business leaders in the city of Otsuthe that the Bank of Japan will continue to purchase massive amounts of government bonds even under its new policy framework targeting interest rates.

Meanwhile, the benchmark Nikkei 225 traded 1.10 percent higher at 18,509.50 by 05:30 GMT. While at 05:00 GMT, the FxWirePro's Hourly Japanese Yen Strength Index remained slightly bearish for second straight day at -82.35 (lower than -75 represents bearish trend).