Japan yields drop to nearly 3-month lows amid dovish Fed bets

BY Reuters | ECONOMIC | 11/29/23 01:28 AM EST

By Kevin Buckland

TOKYO, Nov 29 (Reuters) - Japanese 10-year government bond yields dropped to the lowest level in nearly three months on Wednesday, tracking declines in U.S. Treasury yields after dovish comments from Federal Reserve officials boosted bets for a near-term interest rate cut.

The 10-year JGB yield sank 7.5 basis points (bps) to 0.675% as of 0540 GMT, a level not seen since Sept. 8.

The five-year yield fell 6 bps to 0.260%, the lowest since Sept. 11.

Benchmark 10-year JGB futures rose 0.76 yen to 146.61, the highest since Sept. 8.

U.S. 10-year Treasury yields retreated as low as 4.278% for the first time since Sept. 15, extending overnight declines.

Fed Governor Christopher Waller, seen as a hawkish member of the central bank, said on Tuesday there are good economic arguments for lowering the policy rate if inflation continues falling for several more months.

Traders have priced in a slightly greater than 60% chance of a rate cut of at least 25 basis points by May, according to CME's FedWatch Tool. Expectations were slightly more than 50% before Waller's comments.

Moves in JGB yields were more muted at either end of the curve, with the two-year yield down 1 bp to 0.045%, while the 40-year yield fell 1.5 bps to 1.935%.

The discrepancy is explained by the Bank of Japan's bond-buying under its yield curve control policy, said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

"Liquidity is poor in the 10-year (note) because of the BOJ's massive purchases," she said. "That's why volatility is higher than other sectors."

The 20-year JGB yield slid 8 basis points to 1.420%, while the 30-year yield declined 5 bps to 1.655%. (Reporting by Kevin Buckland; Editing by Sohini Goswami)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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