JGBs rally on receding rate hike expectations
TOKYO, June 18 (Reuters) - Japanese government bond futures rallied on Wednesday, lifted by receding expectations for aggressive interest rate hikes in the United States and Europe.
Hawkish remarks by U.S. and European central bank officials earlier this month roiled JGBs, as they were seen leading to a potential rate hike by the Bank of Japan later this year.
As a result, the lead 10-year JGB futures contract slid to an 11-month low last week.
But recent media reports playing down the possibility of aggressive rate tightening by the Fed and comments by European central bankers toning down their hawkish rhetoric, in addition to a neutral stance by the BOJ late last week on monetary policy, have triggered a JGB rebound.
"Remarks pointing to rate hikes in Europe and the United States caught the JGB market off guard last week, so buyers are feeling slightly more assured after the recent string of events," said Atsushi Ito, a fixed-income strategist at Morgan Stanley.
September 10-year futures jumped 0.75 point to 133.90 2JGBv1. Late last week, the lead contract fell to 132.05, its lowest since last July.
The benchmark 10-year yield slid 6.5 basis points to 1.770 percent JP10YTN=JBTC, down more than 10 basis points from an 11-month peak of 1.895 percent hit on Monday.
RATE HIKES
On Tuesday, the Wall Street Journal said the Fed is unlikely to hike rates in the next few months unless the inflation outlook worsens.
Separately, the Financial Times said on Tuesday that expectations for the Fed to raise rates three or four times by the end of the year do not seem to match the balance of views within the U.S. central bank.
European Central Bank Executive Board member Lorenzo Bini Smaghi said in an interview with Italian daily Il Sole 24 Ore published on Tuesday that a quarter percentage point hike in the ECB's key rate should be enough to bring euro zone inflation back below 2 percent. [ID:nL17725260]
The Bank of England dampened rate hike expectations as well. In a required letter to the government explaining an overshoot in UK inflation, BOE Governor Mervyn King wrote that inflation was likely to be higher than the central bank had expected but that the rate outlook was uncertain. [ID:nL17114934]
Some market watchers said the recent string of seemingly dovish remarks needed to be viewed objectively.
"It was the Wall Street Journal and the Financial Times that appeared to reflect the Fed's stance on monetary policy. The Fed did not make the statement itself," said Hidehiko Maejima, international bond strategist at BNP Paribas Securities.
"Remarks by the ECB's Bini Smaghi also carry less weight than those from (the ECB's) Weber and Stark, who have led the shift in turning monetary tightening from a bias to a likelihood," he said. Continued...
