Bond market, Japanese yen, US inflation, and the European Central Bank decision become this week’s market focus

1. The global bond market sell-off continues to spread, with yields on government bonds across different maturities reaching multi-year highs. This is driving up borrowing costs for governments, corporations, and households, while also challenging high equity valuations. The Middle East war has raised energy prices, lifted inflation expectations, and intensified bets on interest rate hikes, pushing short-term government bond yields in the US and Europe to the highest levels in years. Yields on 30-year government bonds in most major economies are hovering near their highest in over a decade. To curb yields, the US Treasury announced last month it would double the size of its long-term bond buyback program, with the first round of buybacks scheduled for this Wednesday.2. Japan has become the focus of the global bond market, as the yield on 10-year government bonds surpassed 3% for the first time in 30 years, sparking heated discussion about the possibility of large-scale capital repatriation to Japan. Investors are watching whether Japan’s $2 trillion Government Pension Investment Fund will reduce overseas asset allocations and increase domestic bond holdings. Budget requests submitted for the next fiscal year by various Japanese ministries have climbed to pandemic-era levels, and the Bank of Japan may accelerate the pace of rate hikes. As a result, the yen strengthened by nearly 3% last Wednesday and Thursday, but has fallen nearly 2% this week, now hovering near 153.50.3. The US is set to release crucial inflation data this week, which could determine whether the Federal Reserve raises rates in September. PPI will be published on Thursday and CPI on Friday, with surveys expecting August’s CPI to rise by 0.4%. Friday’s much-stronger-than-expected employment data, combined with hawkish remarks by Fed Chair Waller at Jackson Hole, have raised market expectations for a September rate hike to about 60%. Fed Governor Waller stated on Thursday that if data confirm easing inflationary pressures, he would favor keeping rates unchanged.4. The European Central Bank is all but certain to raise rates by another 25 basis points to 2.5% this Thursday, in response to energy prices pushing inflation back above 3%. The market is watching for further moves—traders are betting on one more rate hike before December and another next year, but economists believe the tightening cycle may have ended, with the sharp rise in summer bond yields partially substituting for additional hikes. Investors will also pay attention to ECB President Lagarde’s comments on the US selling euros to buy yen.5. Senegal is facing a debt crisis. After previously undisclosed debts exceeding $10 billion surfaced two years ago, the country is now under IMF assistance and must restructure its debt to ensure long-term sustainability. S&P Global Ratings recently downgraded Senegal’s long-term sovereign credit rating from BB- to B+, further increasing fundraising pressure. The IMF Executive Board will discuss the "Low-Income Country Debt Sustainability Framework" this week, and rule changes could make Senegal’s predicament even more challenging.