TOKYO: Japanese government bond (JGB) yields rose on Thursday as the yen hovered at a 38-year trough, fuelling expectations the Bank of Japan may hike interest rates next month.

Yields edged off highs in the Asian afternoon, however, after solid demand at an auction for two-year bonds.

The 10-year JGB yield was last up 5 basis points (bps) at 1.07% after hitting a one-month peak of 1.08%.

The yen sank to 160.88 per dollar on Wednesday, its weakest level since 1986, spurring more market participants to bet that the BOJ will have to raise rates at its July meeting to slow the currency’s fall.

Markets are now pricing in a 72% chance of a hike, according to LSEG data.

JGB yields rise on BOJ tightening bets amid yen slide

But concerns remain about the state of the nation’s economy, along with questions over whether the bank will raise rates at the same meeting it plans to unveil details of bond purchase tapering.

“If I were asked to state whether or not I think there will be a rate hike (in July), my answer would continue to be no,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management. “However, it’s becoming quite difficult to ignore that there is a possibility.”

Economists polled by Reuters last week were split over the timing of the BOJ’s next rate hike. Meanwhile, US Treasury yields rose, in part due to fears that Tokyo could sell Treasuries to intervene in the foreign exchange market, adding upward pressure on JGB yields.

The two-year JGB yield climbed 4.5 bps to a two-week high of 0.35%.

The bid-to-cover ratio at an auction of the bond on Thursday was 3.83, up somewhat from last month’s 3.78.

A larger figure indicates higher demand.

The five-year yield touched its highest since June 10 at 0.6% before easing to 0.595%.

The 20-year JGB yield sat at 1.905%, off a 13-year peak of 1.93% hit earlier in the session.

The 30-year JGB yield rose to 2.29%, its highest since March 2011.

It was last up 4 bps at 2.275%.