Japanese bonds rally after US Treasury yields hit record low

The Japanese government bonds rallied on Wednesday as overnight fall in US Treasury yields has large positive impact on JGBs. The yield on the benchmark 10-year bonds, which moves inversely to its price fell 3 basis points to -0.277 (record low), short-term 2-year JGB yield fell nearly 1 basis point to –0.328 percent, super-long 40-year bonds slid more than 4 basis point to 0.044 percent, the yield on 30-year JGB also tumbled 4 basis points to 0.023 percent and the yield on 20-year JGB fell 3 basis points to 0.009 percent by 06:15 GMT.

In the early Asian session, the yield on Japan’s 20-year government bond Wednesday fell below zero to -0.005 percent for the first time ever and the 30-year yield was just 0.015 percent, as investors seek safety after Britain’s vote to leave the European Union.

In the global debt market, the 10-year Treasury note yield fell to record low of 1.34 percent, German 10-year bund yield dipped to -0.186 percent, UK gilt yield tumbled to 0.771 percent and the 10-year Australian bond yield fell to record low of 1.848 percent.

On Monday, the Bank of Japan Tankan survey firms' one-year inflation forecast fell to +0.7 percent in June, as compared to +0.8 percent in the first quarter of 2016. This is the 4th consecutive quarterly downward revision in expectations from firms.

Moreover, Asahi press conducted a poll ahead of the coming upper house election and they showed that 55 percent said Prime Minister Shinzō Abe should rethink his economic policies and 28 percent said not. On 10 July Japanese voters will go to the polls in the triennial upper house election. The candidates will be all-too-familiar faces; the party leaders wooden and policy menus unpalatable. The contest is for only half the seats and voters are expected to either vote for the political status quo or not vote at all.

The outcome of the election will have little effect on the Abe government’s ability to pass the legislation. The ruling coalition of the Liberal Democratic Party (LDP) and Komeito holds a two-thirds majority in the lower house, with the ability to override the upper house. A great deal of attention has been paid both domestically and internationally to the chances of the ruling coalition securing 162 seats, and with that two-thirds majority in both houses the ability to amend the Constitution.

On Friday, Japan May consumer price index fell 0.4 percent y/y, against market consensus of -0.5 percent y/y, as compared to -0.3 percent in April. Also, national CPI excluding fresh food fell 0.4 percent, against investors’ expectations of -0.4 percent, from -0.3 percent in April. This spooked that the BOJ will ease further at its July meeting. The next BOJ two day meeting is scheduled to take place on July 28 and 29.

Moreover, the BOJ in its own calculation mentioned that May core CPI rose +0.8 percent y/y, as expected, but lower than the previous +0.9 percent.

Meanwhile, the benchmark Nikkei 225 index closed down 1.85 percent at 15,378.99, and the broader Topix index closed lower 1.79 percent to 1,234.30 points.