TOKYO: Japan’s 10-year government bond yield fell to a near two-week low on Monday, tracking the drop in US Treasury yields in the previous session and due to receding caution of any surprises in the Bank of Japan’s plans to reduce bond purchases.

The 10-year JGB yield fell 3 basis points (bps) to 1.025%, its lowest level since July 17. The five-year yield fell 2.5 bps to 0.6%.

“The market expects that the BOJ will not give any negative surprise on Wednesday when it announces its bond-buying plans,” said Naoya Hasegawa, chief bond strategist at Okasan Securities.

Short-term JGB yields rise as speculation builds for BOJ rate hike

The BOJ is expected to unveil details of a quantitative tightening (QT) plan at its monetary policy meeting and the market expects the central bank to halve its monthly purchases of JGBs to 3 trillion yen ($19.58 billion) in about two years.

The market also estimates it is more likely that the BOJ will raise its policy rate in September.

“We still cannot rule out the rate hike in July. But if the BOJ raises the policy rate this month, the market will become cautious about a further rate hike within this year,” Hasegawa said.

In March, the BOJ ended its negative rate policy and set the overnight call rate as its new policy rate and decided to guide it in a range of 0-0.1%.

Futures contracts pegged to the BOJ’s overnight call rate maturing September 2025 implies the overnight call rate will be at 0.49%.

If the BOJ raises the rate twice this year, the policy rate could be as high as 0.5% at the end of this year, meaning the pace of the rate hikes will be faster than market expectations, Hasegawa said.

The two-year JGB yield fell 2 bps to 0.39%.

The 20-year JGB yield fell 2.5 bps to 1.795% and the 30-year JGB yield fell 2.5 bps to 2.12%.