JGBs Mixed; May Track U.S. Treasurys

Japanese Government Bonds (JGBs) have been trading in a mixed manner recently, with yields fluctuating and market sentiment remaining cautious. As investors await further clarity on the Bank of Japan's (BOJ) policy stance, JGBs may continue to track the performance of U.S. Treasurys, given their close correlation and the influence of global economic conditions on both markets.



Market participants have been closely monitoring the BOJ's recent policy changes, particularly the expansion of the yield curve control (YCC) range and the potential normalization of monetary policy. These changes have sparked renewed interest in the JGB market, which had previously been characterized by low volatility and limited trading activity. However, persistently weak sentiment toward global long-end bonds and the decline in the relative affordability of 10-year JGBs versus futures may challenge the overall market function.

The BOJ's decision to expand the YCC range from 0.2% to 0.25% on March 19, 2021, and subsequently to 0.5% on December 20, 2022, has led to increased volatility in the JGB market. This increased volatility has revived the market function, enabling investors to take advantage of structural market moves. As JGB volatility increases, investors are likely to follow bond yields more closely, boosting demand for more liquid trading instruments like 10-year JGB Futures. These derivatives allow investors to hedge against the risk of higher interest rates without unwinding their positions.

The Osaka Exchange (OSE) announced a revision of the immediately executable price range for the closing auction of 10-year JGB Futures, effective November 21, 2022. This change, along with the OSE's stimulus program launched in April 2022, has improved market liquidity and created opportunities for investors. morgan stanley MUFG Securities Co., a participant in the market-maker program for 20-year JGB Futures, believes that the product has strong potential to become a prominent hedging instrument.



Investors are closely watching the BOJ's policy normalization process, as it could inject much-needed volatility into the JGB market, reviving the market function and enabling investors to take advantage of structural market moves. The BOJ's decision to lift NIRP and YCC on March 19, 2024, and the expansion of the YCC range to between around plus and minus 0.5 percentage points on December 20, 2022, have also impacted the integration or segmentation of JGB and swap markets (BOJ, 2022, 2023).

In conclusion, the BOJ's recent policy changes have led to increased volatility and market function in the JGB market, attracting domestic and foreign investors. The demand for JGB Futures, particularly 10-year and potentially 20-year JGB Futures, has grown, presenting new opportunities for investors to hedge against interest rate risks and take advantage of structural market moves. As JGBs continue to track U.S. Treasurys, investors should closely monitor the BOJ's policy normalization process and global economic conditions to make informed investment decisions in the JGB market.