Bond Markets Sell-Off Accelerates as BoJ Preps Rate Hike

The recent sell-off in global bond markets has accelerated, driven primarily by the short end of the curve. The average yield on 2-year bonds has increased by around 18bps since June, extending the advance to almost 60bps. Higher energy prices have contributed to this shift, with Brent and natural gas prices increasing by around 50% and 100% respectively.

The impact on financial markets has been modest so far, but some currencies have been affected more than others. The SEK, NZD, and AUD have underperformed, while the JPY has been a notable exception. Its recent rebound was encouraged by comments from US Treasury Secretary Scott Bessent that the US Treasury's decision to intervene in support of the JPY was backed up by inside information on potential policy changes in Japan.

The Bank of Japan (BoJ) is expected to raise interest rates next week, with a 25bps hike already priced in. Market participants will be watching closely to see if the BoJ signals that this faster pace of hikes will continue. If it disappoints, it could trigger a reversal of the JPY's recent rebound.