Japan's Bond Yields Hit 3% Amid Inflation Worries and Rate Hike Expectations

Japan's benchmark 10-year bond yield rose to 3% on Tuesday for the first time in 30 years, as government yields increased across Asian markets amid inflation worries and mounting fiscal strains. The surge in borrowing costs is weighing heavily on Japanese equities, particularly technology and artificial intelligence-related stocks.

The Nikkei share average closed virtually flat on Monday due to a mix of tech-sector anxiety and macroeconomic headwinds. Market consensus builds for an imminent Bank of Japan interest rate hike this September, with analysts predicting a high probability of such an event.

The 10-year U.S. Treasury yield hit a peak of 4.76% overnight, while South Korea's 10-year government yield rose to 4.37%. Australia's benchmark yield scaled a five-week high above 5.1%, and New Zealand and Singaporean 10-year debt saw slight upward ticks.

Escalating conflicts in the Middle East have lifted Brent crude futures by 0.7% to nearly $91 per barrel, intensifying global commodity supply fears. The current momentum is boosting expectations for more central bank rate hikes, with markets pricing in a better-than-60% chance that the U.S. Federal Reserve will raise interest rates at its September meeting.

Japanese market sentiment is being adversely affected by structural fiscal factors and weakening supply-and-demand dynamics in the domestic bond market. The chances of an increase in the bank rate in the near future stand at 93%, based on Totan Research and Totan ICAP data.