Market volatility combined with increasing fiscal concerns has led to the Japan 30/5 year government bond yield spread reaching a new high since 2002
The yield gap between Japan's 30-year government bonds and 5-year government bonds has widened to its highest level since 2002, reaching 193 basis points, due to increased global market volatility and fiscal concerns. Market speculation suggests that Japanese authorities may introduce additional budgets early to support the economy, leading to a sharp decline in ultra-long-term government bond prices. Although short-term government bond yields have fallen due to declining interest rate hike expectations, long-term government bond yields have risen due to decreased liquidity and expectations of fiscal expansion, resulting in a steeper yield curve
According to Zhitong Finance APP, the premium for holding Japan's 30-year government bonds over 5-year bonds has widened to its highest level in over 20 years, due to increased global market volatility and concerns about Japan's fiscal situation pushing up yields on ultra-long-term Japanese government bonds. Calculations show that on Monday, the compound yield spread between the two was approximately 193 basis points, the highest since May 2002.
As global bond market turmoil brings pressure, concerns about Japan's growing debt burden have intensified due to market speculation that Japanese authorities are preparing to introduce additional budgets earlier than usual this fiscal year to support the economy, leading to a sharp decline in prices of Japan's ultra-long-term bonds. While it is not uncommon for Japanese authorities to seek additional budgets for spending, they are also considering cash disbursements and reducing consumer spending, which has heightened concerns about the fiscal situation of Japanese authorities.
Takahiro Otsuka, a senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities, stated, "Due to lowered expectations for interest rate hikes by the Bank of Japan, short-term Japanese government bond yields are declining. Meanwhile, long-term Japanese government bond yields are rising due to decreased liquidity and expectations of fiscal expansion. This has led to a steepening of the Japanese government bond yield curve."
Speculation about Japanese authorities possibly releasing additional budgets at some point continues, although Japan's Finance Minister Katsunobu Kato denied such claims on Tuesday. Ryutaro Kimura, a fixed income strategist at Axa Investment Managers, stated, "Fiscal expansion is a medium- to long-term issue, but the biggest problem is rising volatility and declining liquidity. However, there is a glimmer of hope that U.S. Treasury yields are beginning to stabilize, which may help curb the rise in yields on Japan's ultra-long-term government bonds."
Some market participants indicated that U.S. President Trump considering a temporary exemption on tariffs for imported cars and parts could help restore bets on the Bank of Japan pushing for further normalization of monetary policy. Overnight index swap pricing shows a 51% chance of the Bank of Japan raising interest rates by the end of the year, up from 39% last Friday