JGB yields remain a must watch and should be part of the US yield debate

I argued last year and will again today, that one of the reasons for the rise in longer term US interest rates, and in other places too, is the increase in Japanese rates. I attribute last year's move to 5% in the US 10 yr yield to the Bank of Japan ending yield curve control and that the move began within days of the BoJ doing so. Ahead of the BoJ meeting next week and after today its Deputy Governor Ryozo Himino said "The board will have discussion to decide whether to raise the policy rate or not, based on the outlook compiled," the 40 yr JGB yield is rising to its highest level since it was first issued in 2007. The 2 yr JGB yield is at the highest level since October 2008 and the 10 yr yield was up another 4.4 bps overnight to 1.25%, nearing a 14 yr high.

Also of great importance and influence, the BoJ continues to trim its pace of asset purchases and by Q1 2026 will have cut the rate of buying in half from its peak early last year. To put numbers around this, I've seen estimates that the BoJ over a 2 yr time frame is expected to cut QE by about 45 trillion yen which at the current exchange rate equals about $286 billion. The BoJ was the architect of the current iteration of QE and has had its foot on the neck of rates for decades. I don't see how we can have a debate over the US 10 yr yield direction without discussing the moves of the BoJ.

Notwithstanding this, the yen still can't get out of its own way as it is lower today after a 3 day bounce. The FX market and those long yen do not want to hear about a possible rate hike from the BoJ, they want to actually see it.

The US dollar otherwise today is down after the recent voracious strength on the Bloomberg story that some incoming Trump officials are talking about phasing in the tariffs in a measured pace, "month by month, a gradual approach aimed at boosting negotiating leverage while helping avoid a spike in inflation, according to people familiar with the matter." We'll soon see.