Rates Strategy Weekly: Recent Rise in Yen Rates

Mizuho argues that the recent spike in JGB yields was a technical vicious cycle caused by May's heavy auction schedule rather than purely macro-driven. They expect the yield rise to pause as supply pressure eases.

Key Takeaways

• 1.The recent surge in JGB yields, with the 10y briefly exceeding 2.8%, is not fully explained by macro factors like inflation or fiscal expansion.
• 2.Market yields were amplified by a 'vicious cycle' of weak supply/demand in May due to a concentrated auction schedule.
• 3.Japanese long-term OIS rates are already pricing in a high inflation outlook relative to the US and Eurozone when adjusted for potential growth rates.

Table of Contents

• (1) Recent rise in yen rates defies clean explanation
• IS (WAS) MARKET NOT PRICING IN PROLONGED INFLATION?
• FISCAL DEVELOPMENTS: SUPPLEMENTARY BUDGET UNLIKELY TO RESULT IN HIGHER CALENDAR-BASE JGB ISSUANCE
• RISE IN YEN RATES DEFIES CLEAN EXPLANATION
• DEVELOPMENTS THIS WEEK AND IMPLICATIONS FOR RATES OUTLOOK
• SHORT-TERM OUTLOOK (ONE WEEK – ONE MONTH)
• MEDIUM-TERM OUTLOOK (SEVERAL MONTHS – ONE YEAR)
• Risk scenarios
• (2) Envisaged timetable for BOJ JGB-buying operations
• (3) Yen rates relative value and investment strategies

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