Japan Bond Yields Hit 30-Year Peak Amid BOJ Hike Bets

Japan's short-dated bond yields have hit a 30-year high after speculation about an upcoming Bank of Japan interest rate hike. The move is partly due to expectations that the Federal Reserve will tighten policy overnight.

The two-year Japanese government bond (JGB) yield rose by 2 basis points to 1.865%, with equivalent U.S. Treasury yields also climbing. Market participants anticipate a quarter-point increase in the key interest rate to 1.25% on Friday, potentially leading to further hikes and doubling the rate to 2% within about a year.

Some analysts are focusing on how firmly the Bank of Japan will keep the door open for further normalization to prevent significant yen depreciation against the U.S. dollar. This concern comes after the Fed's hawkish stance led to a sharp rebound in the dollar-yen rate overnight, according to David Clewell, a portfolio manager at T. Rowe Price.

However, longer-dated JGB yields fell as declining crude oil prices allayed inflation fears, causing a so-called twist flattening of the yield curve. The 40-year JGB yield dropped by 5 basis points to 4.115%, while the 20-year yield declined by 1.5 basis points to 3.84%. Ten-year yields decreased by 0.5 basis point to 2.99%, and five-year yields rose by 1.5 basis points to 2.295%.