The tailwinds felt in risk assets last week hit a wall on the first day of what will be a lively December for market players and a month littered with potentially impactful event risks. One could argue that the lack of any major moves in DM fixed income last week helped set the platform for risk to rally, but the selling seen across Japan, Australia, the UK, the EU and US sovereign bond markets today - and the repricing in rates to hold a high conviction that the BoJ hike on 19 December - has prevented DM equity from continuing their recent ascent and has inflicted significant technical damage on Bitcoin and the alt-coins.
The focus has been squarely on Japan and the moves in its capital markets. BoJ Governor Ueda’s speech essentially guided traders towards a 25bp hike on 19 December, and the specific wording he used, “The BoJ will consider the pros and cons of raising the policy interest rate and make decisions as appropriate” - strongly echoed the language used by the Deputy Governor shortly before the BoJ hiked back in January. Rates traders reacted by taking the implied probability of a December hike to 86% (from 58%), with the JP swaps curve now pricing a following 25bp hike for September 2026. Traders have lifted the implied BoJ terminal policy rate by 4bp on the day to 1.42%, bringing it closer to the 1.5%–2% range that seems more appropriate. This has seen 5yr JGBs break to new cycle highs of 1.38%.
This is not just about BoJ hikes though, but also the pricing and expectations for increased short-dated JGB issuance in 2026, and the impact that higher funding requirements for PM Takaichi’s expansive fiscal plans could have on term premia. While the BoJ has stated that the real policy rate remains negative, 10yr real JGB yields turned positive on 5 November and now sit at +13bp.
A further rise in 10yr real rates above 35bp (the 2020 high) would constitute a more material tightening of financial conditions and could weigh on the NKY225 and put upside pressure on the JPY - a factor which could lead to an unwind of JPY-funded carry trades.
Equally important is the flow-on effect: selling in JGBs has dragged US Treasury yields 5bp–8bp higher in sympathy. There is also some discussion that traders may have begun reassessing a potential Kevin Hassett appointment as the next Fed Chair, viewing Hassett as the candidate that represents the biggest loss of Fed independence (of the three front runners) - a concern that could be amplified by the Supreme Court’s January decision to potentially uphold Trump’s move to sack Lisa Cook.
One could argue that both the USD and the S&P 500 should be weaker on the day if this were truly the dominant concern expressed in the US Treasury market, but it is certainly a theme brewing in the background, and one we must remain open-minded about as it could evolve into something more problematic.
As Asia’s equity markets reopen, our calls are for small upside moves - but it seems fitting that the JGB market warrants the closest inspection. Further selling (higher yields) may not sit well with those running long-risk exposures.
Good luck to all.
Chris Weston, Pepperstone
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