(Bloomberg) -- Western Asset Management Co. is betting that 30-year Japanese government bond yields won’t rise as much as shorter maturities as the Bank of Japan is less likely to cut holdings of ultra long-term debt.

Demand from life insurance companies and other institutions for super-long bonds should also keep yields from rising too much, Hiroyuki Kimura, head of investment management for Japan, said in an interview last week. Western Asset, a subsidiary of US fund giant Franklin Templeton, sees one more rate hike from the BOJ this year, most likely in the fall, he said. The firm said it managed about $385.4 billion as of the end of March.

Yields on some sovereign bonds in Japan surged to decade highs early last week after the BOJ unexpectedly cut the amount of debt it buys at its regular operations. The yield gap between 10-year and 30-year bonds, which life insurers cite as their main investment target, expanded to around 110 basis points, close to the widest since January last year. The BOJ has been a heavy buyer of bonds due in five years to 10 years and less of longer debt, making it a smaller priority to reduce super-long notes. 

“Bond yields will rise in line with the BOJ’s gradual interest-rate hikes, but will not significantly exceed 1%,” Kimura said in reference to benchmark 10-year sovereign notes. On the other hand he doesn’t expect 30-year counterparts to make a firm break above 2%, leading to the curve flattening about 10-20 basis points.

Ten-year Japanese government bonds yielded 0.95% late Friday in Tokyo, while 30-year yields were 2.055%.

Governor Kazuo Ueda has made it clear that dialing back purchases of JGBs is a separate matter from monetary policy moves, meaning that “the BOJ will try to communicate with the market in a way that avoids creating any surprises,” Kimura said. It’s unlikely that monthly buying will be cut to ¥5 trillion ($32 billion) from ¥6 trillion all at once in June or July, and the BOJ will lower holdings in a cautious manner, he said.

Japan’s central bank still needs to see more economic data to confirm when it can hike interest rates again, making the July meeting too early, he said. 

First-quarter gross domestic product released on May 16 showed a greater-than-expected drop in private consumption expenditure, indicating sluggish domestic demand. “Even though the economy is growing in nominal terms, it is weak in real terms,” Kimura said. 

Key is whether a virtuous cycle where wages are rising in line with increasing prices and consumption is recovering can be clearly seen by the fall. That’s when economic indicators for July and August that reflect the impact of salary negotiations are available, and positive data would allow the BOJ to increase rates by 15 basis points, Western Asset predicts.

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