Citi: JGB Yields May Be Near Their Peak; Increasingly Clear Fiscal Outlook Will Boost Investment Appeal

Citi strategist Tomohisa Fujiki believes that JGB yields may be near their peak, and expects that as Japan's fiscal policy outlook gradually becomes clearer, financial institutions will increase their investment in Japanese government bonds. "JGBs are becoming increasingly attractive," Fujiki wrote in an October 5 report. He said that Japan's potential growth rate has not changed significantly, and that if inflation stabilizes around 2%, the fair level for the benchmark 10-year government bond yield should be 2.5% to 3.0%. Citi expects the JGB yield curve to flatten as the market further prices in future BOJ rate hikes and the supply-demand balance for JGBs improves. JGB yields have continued to rise amid energy-driven inflation concerns, the BOJ's exit from the bond market, market expectations that the BOJ will accelerate monetary tightening, concerns about the Japanese government's fiscal discipline, and a global bond selloff. The yield on Japan's 10-year government bonds rose above 3% for the first time last month, and stood at 3.116% as of publication; the yield on Japan's 30-year government bonds hit another record high, rising as much as 4.279% intraday. However, as global bond markets turn their attention to France's fiscal problems, some investors appear to have begun shifting toward JGBs and considering selling French government bonds. Attracted by high yields, auctions of Japan's 2-year and 40-year government bonds in late September both showed strong investor demand.