Tariff cuts weaken interest rate hike prospects, Japan's 30-year government bond yield hits a 25-year high

On Monday, the yield on Japan's 30-year government bonds surged 5 basis points to 2.955%, reaching its highest level in nearly 25 years and approaching historical peaks.

Since Trump escalated tariff threats in early April, the Japanese bond market has been in turmoil. Investors are facing an increasingly complex risk profile.

On one hand, tariff policies pose a threat to the economy, weakening the likelihood of recent interest rate hikes by the Bank of Japan, making short-term bonds relatively more attractive. On the other hand, tariff policies increase inflation risks, reducing the investment value of ultra-long-term bonds.

"The ultra-long-term bond market is undergoing irreversible structural changes, the 30-year yield may not stop rising at the 3% level," said Mari Iwashita, executive interest rate strategist at Nomura Securities:

"In the context of significant trend shifts such as the Bank of Japan reducing government bond purchases and declining demand from life insurance companies, Trump's tariff policies have caused turmoil in the U.S. bond market and disrupted the supply-demand balance of ultra-long-term bonds."

Japanese bond market in turmoil, long-term yields soar

On the 5th and 12th, market risk appetite significantly increased. According to a statement from the Ministry of Commerce, substantial progress was made in the recent high-level economic and trade talks between China and the U.S., significantly lowering bilateral tariff levels, with the U.S. canceling a total of 91% of the additional tariffs, and China correspondingly canceling 91% of the counter-tariffs; the U.S. suspended the implementation of a 24% "reciprocal tariff," and China also suspended the implementation of a 24% counter-tariff.

As negotiations weakened the demand for safe-haven assets, U.S. Treasury futures fell across the board. Spot gold dropped about $20 per ounce within 5 minutes, falling over 2% during the day, currently at $3229.7 per ounce.

The recent sale of Japan's 10-year bonds recorded the weakest demand since 2021. Investors are also cautious about the upcoming 30-year bond auction on Tuesday.

"We expect the auction results to be lackluster," wrote strategists Ayao Ehara and Shinichiro Kadota from Barclays Japan Securities in a report:

"Demand may be weaker than supply, and with large life insurance companies showing weak purchasing willingness, the term premium (the main driver of the 30-year yield) may continue to face upward pressure."

Analysts believe that even after Monday's sell-off, these ultra-long-term bonds are expected to face further losses.

"Even if the 30-year bond yield exceeds historical highs, unless the structural issue of oversupply in ultra-long-term bonds is resolved, further increases may not stop," said Shuichi Ohsaki, senior portfolio manager at Meiji Yasuda Asset Management in Tokyo