Japan's Long-term Bonds Plummet! Would US Treasuries Be the Scapegoat?

TradingKey - Japan's bonds are currently experiencing a wave of sell-offs. This week, a surprisingly weak auction for 20-year bonds led to a spike in yields, causing a severe decline in long-term bonds. On Thursday, the yield on 40-year bonds reached a historic high of 3.689%, marking a full-point increase since April. Meanwhile, the yield on 30-year bonds hovers near a record high at 3.187%. The benchmark 10-year bond yield has climbed 9 basis points this week, reaching 1.57%.

As the Bank of Japan scales back its bond purchases, traditional buyers have failed to fill the void. Ajay Rajadhyaksha, Chair of Barclays Global Research, suggested in an interview that if the selling persists, the Japanese government might need to utilize state entities to support the bond market.

He highlighted that key institutions like Japan Post and the Government Pension Investment Fund (GPIF) may be called upon to acquire more domestic bonds. This would likely be financed by selling overseas assets, with US Treasuries—where Japanese investors hold significant holdings—being the prime target.

In addition to selling US Treasuries, Rajadhyaksha proposed several potential solutions, including a rate hike by the Bank of Japan. However, the next meeting is not until mid-June, and Japanese policymakers typically refrain from acting between meetings. He also suggested that the Ministry of Finance could reduce long-term bond issuance and increase short-term debt issuance to alleviate pressure on long-term rates, though a similar attempt in April proved unsuccessful. Comparatively, persuading state-owned institutions to purchase more bonds might be more effective.

Rajadhyaksha noted that duration can be interchangeable among developed economies. Therefore, the sharp rise in Japanese bond yields could prompt investors to offload duration exposure in other bond markets, thus impacting those as well.

As of now, the Japanese government has yet to act, but the turmoil in the Japanese bond market is already affecting global markets. Since Tuesday, the yield on the US 30-year Treasury has surged nearly 20 basis points, reaching over 5%—the highest level since the 2008 financial crisis.