Japan's 10-year yield inches higher after moderately firm bond auction

By Junko Fujita

TOKYO, Jan 6 (Reuters) - Japan's 10-year government bond yield reversed course to inch higher on Tuesday after a moderately firm outcome at a same-maturity bond auction.

The 10-year JGB yield JP10YTN=JBTC was up 0.5 basis point (bp) to 2.12%, after falling 1 bp to 2.105% ahead of the auction.

"Despite the current yield level, which is high, the auction outcome was not strong," said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management.

"That is because the market is concerned that the Bank of Japan (BOJ) is behind the curve in dealing with the risk of inflation and it will have to raise the rate higher," he said.

The 10-year bond yields climbed to a near three-decade high in the previous session, as markets braced for further interest rate hikes by the BOJ.

The central bank raised its policy rate to 0.75% from 0.5% last month, but the yen has struggled to regain ground as markets expect the pace of the BOJ's rate hikes to remain slow.

A weaker yen lifts import costs and fuels inflation, reinforcing expectations of further interest rate hikes.

Markets now expect the BOJ's terminal rate to rise to about 1.7%, based on forward one‑year overnight index swaps (OIS) two years ahead, which are pricing in roughly 1.6956%, Inadome said.

The OIS, a rate for swapping the overnight call rate and a fixed interest rate, provides an effective way to monitor market perceptions about the BOJ's monetary policy.

Yields on longer-dated bonds also rose, with the 20-year JGB yield JP20YTN=JBTC edging up 1.5 bps to 3.06%.

The 30-year JGB yield JP30YTN=JBTC rose 2 bps to 3.475%.

The two-year JGB yield JP2YTN=JBTC inched down 0.5 bp to 1.185%. The five-year yield JP5YTN=JBTC was flat at 1.595%.