Citi: Japanese Government Bond Yields May Have Peaked, Clearer Fiscal Outlook to Boost Investment Appeal

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Strategists at Citigroup, led by Tomohisa Fujiki, believe that Japanese government bond (JGB) yields may have already neared their peak, and they expect financial institutions to increase their investments in JGBs as the outlook for Japan's fiscal policy gradually becomes clearer.

In an October 5 report, Fujiki wrote: "Japanese government bonds are becoming increasingly attractive." He noted that Japan's potential growth rate has not changed significantly, and that if inflation stabilizes around 2%, a reasonable level for the benchmark 10-year government bond yield would be between 2.5% and 3.0%.

Citigroup expects the JGB yield curve to flatten as the market further prices in expectations for future interest rate hikes by the Bank of Japan, and as the supply and demand conditions for JGBs improve.

JGB yields have continued to climb amid factors including energy price-driven inflation concerns, the Bank of Japan's withdrawal from the bond market, market expectations that the central bank will accelerate monetary policy tightening, worries about the Japanese government's fiscal discipline, and a global bond sell-off.

Japan's 10-year government bond yield rose above 3% for the first time last month, and stood at 3.116% as of the time of writing; the 30-year JGB yield continued to set new record highs, briefly rising to 4.279% during the session.

However, as the global bond market shifts its attention to France's fiscal problems, some investors appear to have begun turning to JGBs and are considering selling French government bonds. Attracted by high yields, auctions of 2-year and 40-year JGBs at the end of September both showed strong demand from investors.

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