Core Inflation and Fed Interest Rate Expectations  

Federal Reserve officials and market participants are closely monitoring the impact of this inflation increase on interest rate policies. Members of the Federal Open Market Committee (FOMC) have previously indicated that they may delay rate cuts if inflation remains higher than expected. For instance, Fed Chair Jerome Powell recently stated, “Controlling inflation remains our priority.”  

Following May’s data, the likelihood of a rate cut in June has significantly diminished. According to the Kalshi prediction platform, rate cut expectations have dropped sharply. This shift has affected investors’ risk appetite, causing new volatility in financial assets.  

Liquidity and Inflation Reaction in Crypto Markets  

Global liquidity growth has fueled gains in cryptocurrency markets. Experts note that Bitcoin rose 4% to $110,000, moving in sync with the increase in M2 money supply. Other cryptos like Ethereum and Solana also saw similar gains. Analysts highlight that Bitcoin tends to follow changes in M2 money supply within a 71-day cycle.  

Investors eagerly await the June 11 CPI report. This data will reveal whether inflation is persistent and what path the Fed will take. Markets expect interest rates to remain around 425-450 basis points. However, inflation continues to rise. In this environment, the Fed prefers to wait before cutting rates. Federal Reserve officials, especially Chair Jerome Powell and St. Louis Fed President Alberto Musalem, have indicated they would not consider rate cuts if inflation becomes persistent.  

Traditional assets such as bonds and stocks could remain pressured due to inflation. Meanwhile, cryptocurrencies continue to benefit from increased global liquidity, deepening the divergence between markets.  

In summary, today’s US CPI report will be the most critical data guiding the markets.  

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Japan’s bond market is under serious pressure, with both the government and the central bank facing decisions they haven’t encountered in decades. 

Last week, 30-year bond yields rose to 3.2%, up from 2.3% at the beginning of the year. Immediately after, 40-year bonds surged to 3.7%. These sharp increases occurred alongside two consecutive failed bond auctions. A situation known in the market as a “buyer’s strike” has emerged—no one wants to buy Japan’s long-term debt. As prices fall, yields are rapidly rising. 

Why Is Demand Falling? 

Demographics play a major role. According to Kevin Zhao from UBS Asset Management, Japan’s wealthy post-war generation has shifted its investment habits. They are no longer investing for the long term, creating a significant demand gap in the market. 

In addition, life insurance companies are no longer supporting the bond market. Last year, these institutions had purchased long-term bonds, but that wave of buying has ended. Insurers are no longer reliable buyers. This trend was evident in recent auctions: the 20-year bond auction saw its lowest demand since 2012, and this week’s 40-year bond sale drew almost no interest. 

Bank of Japan and Critical Decisions 

The Bank of Japan (BoJ) raised its interest rate to 0.5%. It is also reducing bond purchases by 400 billion yen (about $2.8 billion) each quarter. The tapering process will continue through March 2026. However, without strong buyers in the market, BoJ’s retreat is adding more pressure. BoJ currently holds 52% of Japan’s bond market. It’s uncertain how much longer the market can withstand this pressure. 

All eyes are now on the week of June 16. BoJ’s Monetary Policy Board will hold a two-day meeting to review last year’s bond purchase data. Some market experts believe BoJ may slow down its tapering pace. 

Soon after, the Ministry of Finance will step in. It will review its borrowing plans in consultation with market participants. Expectations are leaning toward reducing long-term bond sales. The ministry has already begun meeting with intermediaries to discuss market conditions. Following this news, yields fell slightly. 

The “Why Should We Buy?” Question Grows Louder 

Moreover, JP Morgan economist Benjamin Shatil argues that BoJ is lagging despite inflation staying above target for four years. Monetary policy has yet to adjust to this reality. Shatil also criticized the Government Pension Investment Fund (GPIF) for not turning to domestic bonds. Liquidity in banks is shrinking, and the number of institutions willing to buy bonds is dwindling. 

Trading desks in Tokyo are buzzing. Ultra-long-term Japanese government bonds are flashing every warning signal. Barclays strategist Shinichiro Kadota says the latest failed auction revealed major underlying issues. 

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