Citigroup: Japanese bond yields may have reached their peak, clearer fiscal outlook will enhance investment appeal

According to Jinse Finance, Citigroup strategist Tomohisa Fujiki believes that Japanese government bond yields may have reached their peak, and expects financial institutions to increase investments in Japanese bonds as Japan's fiscal policy outlook becomes clearer.

In a report on October 5, Tomohisa Fujiki wrote, "Japanese government bonds are becoming increasingly attractive." He stated that Japan's potential growth rate has not changed significantly, and if inflation stabilizes around 2%, the reasonable level for the benchmark 10-year government bond yield should be between 2.5% and 3.0%. Citigroup expects that as the market further prices in the Bank of Japan's future rate hike expectations and the supply-demand dynamics of Japanese bonds improve, the yield curve of Japanese government bonds will flatten.

Driven by concerns over inflation fueled by energy prices, the Bank of Japan withdrawing from the bond market, market expectations of faster monetary policy tightening by the Bank of Japan, worries about the Japanese government's fiscal discipline, and the global bond selloff, Japanese government bond yields have continued to climb. Last month, Japan's 10-year government bond yield rose above 3% for the first time and was at 3.116% at the time of writing; the 30-year government bond yield continued to hit new highs, reaching up to 4.279% during the day.

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