24th February 2025
Recommendation: SHORT
Bond Characteristics (as of 24/2/25):
Issuer: Government of Japan
Type: Sovereign Bond Futures
Contract Size: JPY 100,000,000 notional value per contract
Coupon Rate of Underlying: 6% (fixed)
Maturity Range: 8.5 - 10.5 years
Tick Size: 0.01 points (JPY 10,000 per tick)
Current Yield: 1.95%
Modified Duration: 8.3
Exchange: Osaka Exchange (JPX)
Thesis:
The Bank of Japan has historically maintained an ultra-loose monetary policy, with aggressive Yield Curve Control suppressing long-term bond yields. However, recent developments signal a potential shift towards tighter monetary conditions, increasing downside risk for JGB prices. A combination of rising inflation, potential rate hikes, and global bond market pressure makes JGBs vulnerable to a selloff, justifying a short position on 10-Year JGB Futures.
Catalyst:
Bank of Japan Policy Tightening & End of Yield Curve Control (YCC)
On 22nd February 2025, the BoJ governor hinted at a gradual exit from negative interest rates, reinforcing market expectations of tighter policy ahead.
In October 2024, the BoJ adjusted its YCC by widening the tolerance band to ±1.5%, allowing more market-driven movement in long-term yields.
If the BoJ abandons YCC entirely, JGB yields could spike sharply, leading to lower JGB futures prices.
Rising Inflation & Wage Growth in Japan
Japan’s core CPI has remained above 2% for 18 consecutive months, pushing the BoJ closer to rate hikes.
Large corporations, including Toyota and Sony, have implemented significant wage hikes, contributing to demand-pull inflation.
Inflation will seemingly continue to exceed the BoJ’s target and policymakers will be forced to raise interest rates, increasing JGB yields and lowering JGB prices.
Japanese Yen Depreciation & Capital Flight
The USD/JPY exchange rate has crossed 152, prompting fears of BoJ intervention.
U.S. Treasury yields are on the rise and have made JGBs less attractive for global investors, triggering a potential capital outflow from Japan - lower demand would mean lower prices.
Analyses:
Sector-Wide Analysis:
The global bond market is pricing in higher-for-longer interest rates, increasing yields across the U.S., Eurozone, and U.K. bond markets.
U.S. 10-Year Treasury Yields have risen from 3.9% in January to 4.35% in February 2025, putting upward pressure on JGB yields.
Bund yields have also climbed to 2.7%, reflecting broad bearish sentiment in global fixed-income markets.
Comparative Developments in Other Sovereign Bond Markets
United States:
The Federal Reserve has maintained a restrictive policy stance, delaying rate cuts until late 2025.
U.S. 10-Year Treasury Yields have increased from 3.85% in December 2024 to 4.35% in February 2025, reflecting continued market expectations of prolonged tight monetary policy.
U.S. 2-Year Treasury Yields are currently at 4.85%, up from 4.25% in November 2024, reinforcing short-term yield pressures.
Rising U.S. Treasury yields have set a global benchmark for higher borrowing costs, making JGBs comparatively less attractive.
Eurozone:
The European Central Bank (ECB) announced it will continue quantitative tightening, reducing demand for sovereign bonds, which impacts JGBs indirectly.
German 10-Year Bund Yields have increased from 2.3% in December 2024 to 2.7% in February 2025, reflecting increased investor expectations of further tightening.
Eurozone inflation remains sticky at 3.2% YoY, reducing the likelihood of ECB rate cuts in early 2025.
United Kingdom:
U.K. gilt yields have been rising due to continued fiscal pressures and inflation expectations, reinforcing the global trend of higher yields.
U.K. 10-Year Gilt Yields have risen from 3.8% in December 2024 to 4.3% in February 2025.
U.K. inflation remains at 4.0% YoY, limiting the Bank of England’s ability to cut rates in the near term. Even though we saw consistent cuts over the last 9 months, the BoE’s latest statement seemed to signal that there would be heavy reconsideration before further rate cuts take place.
10 Year Japanese Government Bond Analysis:
Clearly, there is a constant rise in yield for the bond, and similar behaviour is expected in the future taking into account the macroeconomic situation. This increase in yield is induced by a decline in price. We also see similar behaviour in Figure 2:
Conclusion:
Given the Bank of Japan’s potential policy shift, rising inflation, capital outflows, and a global bond market selloff, shorting 10-Year JGB Futures presents a compelling risk-reward trade.
Execution:
Sell JGB Futures (JB) on the Osaka Exchange (JPX).
Target Yield Move: From 1.95% to 2.50%, leading to an estimated 5-7% price decline in JGB futures.
Exit Plan: Cover the short position if the BoJ delays policy tightening for 3 months or global yields start to decline.
Sources:
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