The Japanese bond crisis enters a new phase: 10-year yield breaks the warning line

Under the dual pressure of political uncertainty and fiscal concerns, the storm in the Japanese government bond market is intensifying, with the core 10-year bond yield breaking through the warning line, and market nerves are highly strained.

On Tuesday, July 15, the yield on Japan's 10-year government bonds rose by 2.5 basis points to 1.595%, reaching its highest level since 2008. At the same time, the 20-year yield climbed 3.5 basis points to 2.64%, and the 30-year yield increased by 4 basis points to 3.195%, both hitting new highs since 1999. Bonds with maturities of 20 years and above have cumulatively risen by at least 20 basis points this month.

This surge in yields occurs on the eve of the Japanese Senate elections, with market concerns that the ruling coalition may lose, potentially leading to a significant shift in fiscal policy and further exacerbating selling pressure in the bond market. Analysts warn that if "bond vigilantes" sell off on a large scale, the Japanese bond market may experience severe turmoil reminiscent of the UK's "Truss moment." In 2022, former UK Prime Minister Liz Truss was forced to resign after a radical tax cut plan triggered a collapse in the bond market.

Unlike ultra-long-term bonds, the rise in the 10-year government bond yield has a more direct impact on the real economy. Yuichi Kodama, an economist at Meiji Yasuda Research Institute, pointed out that the 10-year yield serves as the pricing benchmark for fixed mortgage rates, and its increase will raise financing costs for businesses and households, thereby affecting economic activity.

Atsushi Takeda, chief economist at Itochu Research Institute, added that while ultra-long-term bonds have limited impact on corporate financing, the sustained rise in the 10-year yield is worth close attention, especially against the backdrop of questionable fiscal health.

Takahiro Otsuka, a senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities, stated: "The 10-year yield is being pushed up by instability in ultra-long-term bonds due to concerns over demand and declining liquidity. It cannot be said with certainty that the 10-year yield will stop rising around the 1.6% level."

Election Approaches, Fiscal Outlook Raises Market Alert

Japan is set to hold its Senate elections on July 20.

This upcoming Senate election has become a key factor driving bond yields higher. Multiple media outlets and polls indicate that the ruling Liberal Democratic Party and its coalition partners face the risk of losing. The opposition parties' campaign platforms include populist promises such as cash distributions, consumption tax cuts, and education subsidies, raising market concerns that these policies will increase the fiscal deficit and undermine bond investor confidence.

An earlier article from Wall Street Journal reported that the likelihood of the ruling coalition losing its majority is increasing. Several polls show a declining trend in the expected number of seats for the ruling coalition , which could lead to the resignation of Prime Minister Shigeru Ishiba, a pause in US-Japan trade negotiations, and weakened expectations for interest rate hikes And it has a significant impact on the Japanese stock market and monetary policy. The market expects that a potential new government in Japan may shift towards a more accommodative fiscal policy.

Ataru Okumura, an interest rate strategist at SMBC Nikko Securities, pointed out that if the ruling coalition loses, overseas investors may accelerate the sale of ultra-long-term government bonds, fearing an increased likelihood of a consumption tax cut. Koichi Sugisaki from Morgan Stanley MUFG Securities also expressed a similar view, stating that the uncertainty surrounding fiscal policy is exacerbating market volatility.

Okumura noted that while he does not expect Prime Minister Shigeru Ishiba to resign directly due to turmoil in the bond market, if the ruling coalition loses, market turmoil may be difficult to avoid.

Global Bond Sell-off Spreads

The rise in Japanese bond yields is part of a global phenomenon. According to Bloomberg, long-term government bonds worldwide are declining, as investors worry that governments around the world are spending beyond their means.

The yield on Japanese government bonds with maturities of 20 years or more has risen by at least 20 basis points this month, as part of a global bond market sell-off, with investors increasingly concerned about government fiscal conditions. Koichi Sugisaki, a macro strategist at Morgan Stanley MUFG Securities, stated in a research report that a loss for the ruling coalition could see overseas investors accelerate the sale of ultra-long-term bonds due to concerns about the greater likelihood of a consumption tax cut.

Although Bank of Japan Governor Kazuo Ueda stated that the impact of ultra-long-term yields on the real economy is limited compared to short-term debt, he also indicated that he would closely monitor developments. Kodama stated:

Ueda is currently downplaying the surge in ultra-long-term yields, but I am confident he is closely watching the situation. He avoids making explicit comments, as any statement could be interpreted as a signal of market intervention or intervention thresholds