[Bond weekly outlook]Long-term interest rates will rise, or reaction to "high market trade" due to new Governor Ishiba

(Bloomberg):Long-term interest rates are expected to rise (prices will fall) in the bond market during the first week of October (September 30th – October 4th). In the runoff election for the Liberal Democratic Party’s leadership, former Secretary-General Shigeru Ishiba, who is positive about financial normalization and fiscal reconstruction, defeated Economic and Security Affairs Minister Sanae Takaichi, who was critical of the Bank of Japan’s interest rate hikes. There is a view that the trend of unwinding the “high market trade” of a weak yen, high stock prices, and low interest rates will continue.

Market participants’ perspective

◎Kazuhiko Sano Chief Fixed Income Strategist at Tokai Tokyo Securities

With the unwinding of the “high market trade,” yields will rebound from short-term to long-term, and to what extent will ultra-long-term interest rates rise? Mr. Ishiba is a proponent of fiscal reconstruction, and there is a possibility that ultra-long-term interest rates will not change much.
Mr. Ishiba is not expected to have much say in the Bank of Japan’s further interest rate hikes, and the yield curve is likely to flatten. If the yield level returns, I think we will be able to safely bid on 2-year and 10-year bonds.
On the other hand, long-term interest rates in the United States are expected to decline, and the yen bond market is expected to be neutral to slightly followable. With US employment statistics coming soon, excessive interest rate rises will likely be curtailed.
Expected yield range for newly issued 10-year government bonds is 0.83-0.89%

◎Senior Bond Strategist, Makoto Suzuki, Okasan Securities

Investor activity will gradually become more active in the second half of the fiscal year, but it is necessary to assess the economic policies of the new administration. With the U.S. employment statistics coming up, it will be a little while before things get serious.
There are concerns about auctions for 2-year and 10-year bonds due to the decline in yield levels, but the demand at the beginning of the period will probably allow them to be sold safely.
- The Bank of Japan’s government bond purchases are expected to decrease by 100 billion yen per month for 1-3 years and 3-5 years, and 200 billion yen per month for 5-10 years, factors that will suppress yield declines.
While it is difficult to expect yields to rise significantly due to concerns about a slowdown in the global economy, expectations for further interest rate hikes by the Bank of Japan in the future will likely limit the decline in yields.
Expected yield range for newly issued 10-year government bonds is 0.79-0.88%

government bond auction

main material

30th: Bank of Japan plans to purchase government bonds from October to December
30th: U.S. Federal Reserve Chairman Jerome Powell gives a speech
1st: Bank of Japan’s short-term economic observation survey of companies nationwide (Bank of Japan Tankan)
1st: Main opinions from the September Bank of Japan Monetary Policy Meeting
1st: Number of US job openings in August and US ISM manufacturing industry business index in September
3rd: Bank of Japan Councilor Akira Noguchi gives speech and press conference
3rd: September US service industry PMI and US ISM non-manufacturing industry general business index
4th: September US employment statistics

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