Prospects for the opening of the Hormuz Strait are overshadowed, Asian bonds under pressure: 2Y Japanese bond yield approaches 2%, 3Y Korean bond yield rises to highest level since 2022

According to Zhitong Finance APP, Asian bond yields generally rose on Monday, with Japanese and South Korean government bonds falling after US President Donald Trump rejected Iran's latest proposal to reopen the Strait of Hormuz, causing oil prices to increase.

As investors ramped up bets on further rate hikes by the Bank of Japan, Japan's two-year government bond yield is approaching the critical 2% threshold. The yield, which is highly sensitive to monetary policy expectations, rose as much as 4 basis points on Monday to 1.975%, marking its highest level since 1995. Yields on other maturities were also under pressure, with the five-year yield climbing 3 basis points to 2.43%.

Bank of Japan Governor Kazuo Ueda did not provide clear guidance on the pace of future tightening after a widely expected rate hike earlier this month, leading investors to worry that the central bank may act too slowly. This has intensified market expectations that policymakers might eventually need to take a more aggressive approach to raising rates, especially as the hawkish Federal Reserve threatens to maintain the interest rate differential between the US and Japan.

Former Bank of Japan Monetary Policy Board member Kazuo Momma said in an interview that the central bank might raise its benchmark rate for a second consecutive month in October—a timeline earlier than many economists anticipate. Overnight index swaps show about a 40% chance of a hike in October, with the possibility of a 25-basis-point increase in December already fully priced in.

Analysts note that a more severe test may come with Wednesday's two-year government bond auction. The market widely expects the Bank of Japan to raise rates in December, with some analysts even arguing that an October hike is possible. This could lead buyers to stay on the sidelines until yields reach at least 2%, particularly if Thursday’s Tankan report strengthens expectations for further tightening.

The weak yen has further stoked concerns about monetary policy tightening. US President Trump voiced concerns about the yen’s exchange rate during his recent meeting with Japanese Prime Minister Sanae Takaichi, while Japanese Finance Minister Satsuki Katayama stated that Takaichi is "not an inflationist," seeking to ease worries that the government will pressure the Bank of Japan to keep rates low.

SMBC Nikko Securities strategists including Ataru Okumura noted in a report that as both Japanese and foreign policymakers increasingly focus on the weakened yen, bets on the Bank of Japan accelerating its tightening are heating up. They said fiscal expansion by major economies and rising commodity prices could also reinforce market expectations that Japan will ultimately need to tighten policy to curb inflation.

Meanwhile, South Korea's three-year government bond yield rose to its highest level since November 2022, joining the global sell-off as high oil prices stoked inflation worries, with yields rising 11 basis points to 4.11%. Local markets will be closed Thursday and Friday, during which time US long-term Treasury yields reached a more than 20-year high.

NH Investment & Securities fixed income analyst Kang Seungwon said, "The surge in South Korean government bond yields indicates that this is not just a US problem; it also shows growing market concerns that the Bank of Korea will have to raise rates further." Kang added that if the Fed hikes rates for a second consecutive time in October, it will likely prompt the Bank of Korea to do so in November.

Since the beginning of the year, continued conflict in the Middle East has pushed oil prices higher and weakened South Korea’s bond market, raising concerns about accelerating inflation in a country heavily dependent on imported energy. The Bank of Korea has already raised rates twice in a row, after an unprecedented boom in the semiconductor sector propelled the economy to stronger-than-expected growth, further adding to inflationary pressure.

The Bank of Korea held a market assessment meeting on Monday to evaluate global financial conditions during the September 24–27 holiday period. In a statement after the meeting, the central bank said it would closely monitor the market as volatility could increase.