BOJ Governor Ueda hints at potential rate hikes

Japanese government bond (JGB) yields experienced a rise on Monday, following a decrease in tensions in the Middle East. The fears of further conflict eased as Iran downplayed an Israeli drone attack and indicated no plans for retaliation. This move was aimed at preventing a region-wide war, leading to a rebound in JGB yields. The 10-year JGB yield increased by 5 basis points to 0.880%, after hitting a low of 0.825% on Friday.

As the Bank of Japan's (BOJ) April meeting approaches, BOJ Governor Kazuo Ueda hinted at a potential interest rate hike if underlying inflation continues to rise. Ueda also mentioned the possibility of reducing the central bank's bond purchases in the future. This shift in tone towards a more positive outlook signaled the BOJ's focus on upcoming rate hikes, potentially as early as July.

While Ueda's comments influenced market sentiment, the primary driver behind the yield movements on Monday was the easing geopolitical concerns rather than the BOJ's statements. Market consensus still leans towards expecting another rate hike in October, despite the increasing likelihood of a July hike. The two-year JGB yield rose by 2 basis points to 0.275%, the five-year yield increased by 3.5 basis points to 0.485%, and the 30-year JGB yield climbed by 4 basis points to 1.920%.

In conclusion, the JGB market reacted to the calming of tensions in the Middle East and the BOJ's hints at potential rate hikes. Investors are closely monitoring the evolving situation and the central bank's future policy decisions to gauge the direction of JGB yields in the coming months.