Bond markets in the United States and Europe are going through a tense moment this Friday, after the Bank of Japan (BoJ) raised its benchmark rate to 0.75%, the highest level since 1995. The clear indication that interest rates could be raised again, in a more aggressive tone from the monetary authority, which is historically unusual for the BoJ, has given impetus to the movement of liquidation of sovereign bonds in other countries, after Japanese ten-year bonds (JGB) rose above the 2% mark for the first time since 1999.
Around 9:55 a.m., the yield on the two-year T-note rose from 3.485% of the previous close to 4.151%. The interest rate on the ten-year T-note increased to 4.150% from 4.125% at the previous close. The ten-year JGB stood at 2.024% compared to 1.954% at the previous close.
In Europe, paper yields have reached levels not seen in decades. The ten-year OAT (French sovereign bonds) rose from 3.555% to 3.597%, its highest level since 2011. In Germany, the ten-year Bund rose from 2.852% to 2.885%, also surpassing 2011 rates.
The global market is entering a phase of divergence in the direction of monetary policy. While the Federal Reserve is expected to continue cutting interest rates next year, the BoJ has signaled the possibility of raising rates depending on economic conditions and other central banks, such as the European Central Bank (ECB) and the Bank of Canada (BoC), have indicated they expect a period of stabilization.
For the US bond market, Ian Lyngen of BMO Capital notes that the uncertainty of this scenario will be more pronounced at the long ends of the curve, starting at the ten-year end. “We suspect that this curve can further increase under the influence of the JGB and that the objective is to retest the level of 1.20 percentage points in the coming days,” he assesses.
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