What are JGBs Trying to Tell Us?March 23, 2023
Yields on 10-Year Japanese Government Bonds have fallen by about a third over the past two weeks, as shown in the chart below.
Given the tumult surrounding banks recently, and a series of relatively dismal economic data releases out of Japan, this isn’t exactly surprising. This month’s Bloomberg economic survey saw Japanese GDP forecasts fall to 1.05 and 1.1 for 2023 and 2024 respectively. Additionally, Japan reported its 19th consecutive monthly trade deficit last week, per the Wall Street Journal. Though export levels have been improving lately, a strengthening Japanese Yen could prove to be a strong headwind for further export gains. So given all this, it is not particularly surprising that JGB yields have fallen. When combined with banking chaos, speculation on changes in BoJ policy, and recent rumblings about increased taxes, this perhaps even explains the precipitous nature of the drop.
Where this gets more interesting is in looking at the 10-Year UST-JGB spread, shown below compared to the JPY/USD spot.
In its meeting yesterday, the US Fed demonstrated its resolve to maintain focus on price control and made a show of not being (too) rattled by troubled lenders, but the UST-JGB yield spread calls this into question. If investors believe that the Fed will continue tightening, then this spread should be widening, not narrowing as has been over the past month. Further, price action in the JPY/USD FX market has served to validate an inverted US yield curve. If what we see here is to be believed, and the Fed is soon to wax dovish, then the 10-Year UST-JGB spread could continue to narrow, which would in turn support continued yen strength against the US Dollar.