(Bloomberg) -- A handful of big-name investors are still betting on more interest rate hikes in Japan in the coming months, even after a sharp decline in market pricing for more tightening this year.

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Vanguard, the world’s No. 2 asset manager, has doubled down on its short position in Japanese government bonds as it still sees the possibility that the central bank can deliver an additional 50 basis points of rate hikes by December. The prospect of another hike has also prompted M&G Investment Management to keep adding to its short JGB position, while staying overweight on the yen. RBC BlueBay Asset Management continues to dump Japan’s 10-year sovereign bonds.

These positions are at odds with the overnight swaps market, which is pricing about a 29% possibility that the Bank of Japan will raise rates from 0.25% by the end of the year, down from about 63% at the start of the month. They are also in contrast to the likes of AllianceBernstein, which has said the BOJ will find it difficult to raise rates further in 2024 unless the yen slumps back past 160 to the dollar. But if the trio are proved right, the tighter policy may spur more gains in the yen, along with an ongoing, gradual rise in JGB yields.

While BOJ Governor Kazuo Ueda flagged on July 31 that rates were likely to keep rising after the increase that day, expectations for more tightening soon slid. A run of weak US data triggered a wave of selling in risky investments, including yen-funded carry trades, and comments from Deputy Governor Shinichi Uchida suggesting that policymakers would refrain from raising interest rates when markets are unstable were taken by many investors as a dovish signal. Then a leadership race for Japan’s ruling party further clouded the outlook for hikes in the near term.

The sharp reversal in rate hike expectations has triggered a tumble in the 10-year JGB yield this month. But Mark Dowding, chief investment officer at BlueBay and a perennial JGB bear, is still looking to ramp up bearish bets in the maturity on expectations the central bank will raise rates again.

“The Japan trade has cost us in the past few weeks,” he said, but “we are under no compulsion to close.”

“The data and the news flow supports our thesis. So this tells us that we want to be patient with the position,” said Dowding, who sees the next hike coming in January.

Vanguard’s Ales Koutny, head of international rates, has a similar view to BlueBay and has reloaded his short JGB position. The asset manager has long been underweight JGBs on the view that the BOJ will need to raise rates faster than expected.

“Some people took Uchida’s comments to mean the BOJ won’t ever hike rates again, but I took them as a reassurance to the market,” Koutny said. Following Japan’s exit from its decades-long fight against flat and falling prices, rising wages can boost the domestic economy and keep the door open to up to two more hikes this year, he added. Still Koutny acknowledged that the BOJ may hold off from hiking during times of market instability.

As all three investment firms hunker down on their bets for a rise in shorter-dated JGB yields, they have entered curve-flattening trades, buying bonds with expiries of 30 years or more on the view that 10-year yields are still too low at current levels. M&G also remains overweight on the yen, which rallied more than 1% versus the dollar on Monday and traded at 145.78 as of 4:02 p.m. in Tokyo.

“We think the BOJ is likely to be more hawkish than perhaps the market wants it to be,” said Eva Sun-Wai, fund manager at M&G. “It wouldn’t surprise me if we get another small hike before the end of the year.”

--With assistance from Alice Gledhill and Masaki Kondo.

(Updates prices throughout)

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