(Bloomberg) -- A relief rally in US Treasuries has spilled over into Japan’s under-pressure bond market ahead of its key central bank policy decision Friday.

Bond futures recovered from deep losses Wednesday as benchmark Treasury yields slumped by almost 20 basis points overnight. Speculators had pushed the contracts to the brink of a trading halt, as the Bank of Japan struggles to convince markets its super-easy policy is sustainable as the Fed aggressively hikes.

With the Federal Reserve meeting perceived as less hawkish than expected, traders now turn their attention to the BOJ, which has ramped up bond purchases this week in a bid to cap rising yields. Wagers on a tweak to its curve-control policy have mounted, in particular with the yen trading at a 24-year low. 

Bets the Bank of Japan Will Break Are Popping Up Across Markets

While expectations are that the central bank will stick with all its main policy settings when it finishes a two-day meeting Friday, the BOJ risks ramping up pressure on yields, accelerating the slide in the yen and exacerbating public angst over rising prices.

Foreign funds have ramped up their selling of Japanese bonds. In the week to June 10, they sold 1.1 trillion yen ($8.2 billion) worth -- the largest since April, according to the latest data from Japan’s finance ministry. 

Ten-year yen swap rates -- which are popular with international funds -- have surged, breaking their close relationship with domestically driven yields. At close to 0.50%, the former have pushed well past the central bank’s 0.25% “line in the sand” for benchmark bonds, suggesting overseas traders believe higher yields and a policy change in Japan are inevitable.

(Updates throughout)

©2022 Bloomberg L.P.