Goldman Revise Up JGB Yield Forecasts

Goldman Sachs note that “the current 10-Year yield has rebounded after dropping to around 38bp and appears likely to test the 50bp upper bound ahead of the auction next week. Although the prior two series (#367 and 368) are trading with sharply lower yields, they are outliers, and we believe most likely facing a short squeeze.”

• “There are a few factors driving the broader upward pressure in yields. First, on the domestic side, is an updating of wage growth projections. Even so, it could take a while for basic wage growth to exceed 3%, viewed by the BoJ as a prerequisite for sustainably hitting its 2% inflation target.”
• “Second, ostensibly for “market functioning” reasons, we expect the post-Kuroda BoJ will move its YCC target from the 10-Year maturity to something shorter (possibly in Q223). Given the BoJ’s active supply of low cost funds for up to the 5 years, this maturity could be the new target - we assume the BoJ would try to cap these yields around 20-25bp.”
• “Third, we believe that the upward pressure from global bond yields will likely re-emerge in Q223.”
• “We have revised our JGB yield forecasts to reflect these views. 10-Year yields now peak at 90bp later this year, before settling down towards our fair value estimate of 75bp next year.”