UST bond yields are higher and no doubt yields in the UK and Germany will open higher later this morning following the huge sell-off of super-long JGBs in Japan. The 30-year and 40-year yields jumped 27bps and this move can only be described as a total rout that illustrates a complete loss of confidence in JGBs. Comments from Japan’s Growth Strategy Minister, Minoru Kiuchi certainly didn’t help. He appeared to play down the fiscal link to JGB moves stating that yields move for many different factors and that the government will be ‘mindful of fiscal discipline’ when implementing the sales tax cut, MUFG’s FX analyst Derek Halpenny reports.
BoJ under pressure as Yen weakens on bond turmoil
“JSDA data highlight the risk of over-dependence on foreign investors in the super-long sector of the JGB market. Foreign investors bought JPY 13.4trn worth of JGBs with a maturity over 10 years in 2025, which was an all-time high in the data series going back to 2005. Trust banks (used by pension funds) were the next biggest buyers but way back on JPY 4.7trn. Foreigners are being stopped out in significant intra-day moves that could have a lasting impact on sentiment. If foreigners turn their back on the JGB market we could see more days like we have had today.”
“This disruptive sell-off was ultimately self-inflicted and was triggered by PM Takaichi acknowledging that the LDP would include a sales tax cut on food for up to two years in the election manifesto. Investors know that the budget backdrop doesn’t provide scope for this to be financed by revenues and hence the assumption is that additional JGB issuance will be the source of funding. This underlines the perceived indifference of senior government officials and the PM to creating disruptive JGB market conditions and will only reinforce the potential for further selling.”
“Pressure is now going to build on the BoJ to step in as buyer of last resort. The BoJ is still allowing JGBs to fall off the balance sheet adding to supply although the pace of reduction in JGB purchases will slow from JPY 400bn per month to JPY 200bn in April. But outright buying if we get more days like today will become necessary. The BoJ being behind the curve is also creating selling pressure and this price action will pressure the BoJ to convey a more hawkish message to ensure inflation is brought back to target. The yen is notably weaker (mainly vs non-dollar crosses) and JGB market turmoil will likely reinforce yen selling ahead.”