The bond market is seeing trouble. Why investors are buying now anyway.
The bond market is seeing trouble. Why investors are buying now anyway.. Interest-rate increases ordinarily support a country's currency, push up its bond yields, and put pressure on its stock market.
What happened
Japan's currency, bond yields, and stock market did exactly the opposite. “The higher that yields go — for at least new money — it becomes more enticing to think about putting money into bonds,” one strategist notes. Members of the Federal Open Market Committee showed their lowest level of worry about gross domestic product growth since it first started releasing its outlook. Skip NavigationMarketsBusinessInvestingTechPolitics & PolicyVideoWatchlistInvesting ClubPROLivestreamMenuKey PointsThe BOJ raised its policy rate by 25 basis points to 1. Despite the faster pace, the yen weakened, the 10-year Japanese government bond yield slipped and the Nikkei 225 gained.
Greg Baker | Afp | Getty ImagesJapanese markets reacted in a seemingly counterintuitive fashion on Friday after the country's central bank hiked benchmark interest rates to their highest in 31 years. The yen weakened past 157 against the dollar, the yield on the 10-year Japanese Government Bond slipped, while the Nikkei 225 gained 1.
The wider picture
Experts pointed to the split decision by the BOJ's board, as the reason for the uncharacteristic market reaction, as it indicated that the bank might not take a too hawkish stance. The reaction of the market also stems from the fact that this hike also took place without an updated outlook report, which limited the BOJ's ability to reinforce a hawkish message through revised forecasts, according to Masahiko Loo, senior fixed income strategist at State Street Investment Management.
"Secondly, if we look at the statement, all the phrases and the tone was almost similar to what we saw in the quarterly outlook report published in July, so the tone was less hawkish than financial markets had hoped for," he added. The 10-year Treasury note has logged its worst five-year return in more than a century, according to Goldman Sachs. 25%, its highest since 1995, just three months after its previous hike. Analysts pointed to two dissenting votes and the absence of updated economic forecasts.
Another hike could come around December, but experts disagree over where rates will ultimately peak. An electronic quotation board displays the Nikkei 225 stock prices on the Tokyo stock Exchange in Tokyo on Nov.
What has been reported
The hike brought the policy rate to its highest level since 1995, and came just three months after its previous increase. "The two dissenting votes in favor of keeping rates unchanged came as a surprise," said Hirofumi Suzuki, chief FX strategist at Japanese bank Sumitomo Mitsui Banking Corporation. The decision to hike was split 7-2, with board members Toichiro Asada and Ayano Sato dissenting from the verdict. Asada noted that as the core inflation rate was below 2%, the economic situation might not be strong, and advocated for holding rates steady.
Core inflation for August in Japan stood at 1. Sato also said current economic and price developments did not appear to have substantially accelerated compared to before. His view was also echoed by Shigeto Nagai, head of Japan economics at Oxford Economics. Nagai told CNBC's "Access Middle East" that the two dissenters signaled that Prime Minister Sanae Takaichi was not convinced to accede to the U.
What happens next
Treasury Secretary Scott Bessent had stressed on the need for higher BOJ rates in his meeting with Japanese Finance Minister Satsuki Katayama in May. Experts believe that another hike, likely in December, is on the table. State Street's Loo said he expects BOJ Governor Kazuo Ueda to emphasize that every forthcoming meeting remains "live. ""The debate is no longer whether the BOJ hikes, but how far rates ultimately go," he added. The BOJ said it would continue raising rates as economic and price conditions develop.
But it also acknowledged that growth was likely to decelerate due to high oil prices stemming from the Middle East conflict. Sam Jochim, economist at EFG International, said rates could rise roughly once every three months as underlying inflation approaches 2%.
The report has been compiled by The Daily Waves using information reported across marketwatch.com, cnbc.com. Details are presented according to the information available at the time of publication and may change as authorities, organisers or other relevant parties provide updates.