The global long-term bond sell-off spreads, with Japan's 30-year government bond yield hitting a record high

In the wave of global government bond sell-offs, the Japanese market is facing dual pressures of "internal and external difficulties."

On Wednesday, the yield on Japan's 30-year government bonds briefly rose to 3.28%, reaching the highest level on record. Meanwhile, the yield on 20-year government bonds also hit 2.69%, a new high since 1999.

The sharp fluctuations in the Japanese bond market come at a time when global concerns about the scale of government debt in various countries are deepening. The previous day, the yield on UK 30-year government bonds had risen to its highest level since 1998, while the yield on French 10-year government bonds also increased due to concerns about government stability. The yield on US 30-year government bonds returned to around 5%, reflecting a pessimistic sentiment among global investors towards long-term debt.

In addition to external pressures, domestic political uncertainty in Japan has also become a catalyst for the sell-off. The market is increasingly worried that Prime Minister Shigeru Ishiba may be forced to resign due to the electoral defeat of his ruling Liberal Democratic Party. This change could lead to a relaxation of fiscal discipline, further exacerbating investor anxiety. As a result, the exchange rate of the yen against the dollar fell to its lowest point in about a month on Tuesday. As of the time of writing, the dollar/yen rose 0.13% to 148.52 yen. The next focus for the market will be the auction of Japan's 30-year government bonds scheduled for this Thursday.

The Eye of the Storm in the Global Bond Market

The decline in Japanese long-term bonds is not an isolated event but a reflection of the turmoil in the global debt market. From the United States to Europe, concerns about increased government spending and persistent inflation are driving long-term yields higher across the board.

On Tuesday, issuers around the world sold at least $90 billion in investment-grade corporate bonds in a single day, making it one of the busiest weeks of the year. The massive influx of corporate bond issuance diverted funds that might have been directed toward the sovereign bond market, adding extra pressure to government bond demand.

Takashi Fujiwara, Chief Fund Manager at Resona Asset Management, stated:

"Global fiscal concerns are driving the sell-off of ultra-long bonds, creating significant steepening pressure on the yield curve."

Infighting Within the Ruling Party Adds Woes

Domestically in Japan, turmoil within the ruling Liberal Democratic Party adds new variables to the market. A report released by the party on Tuesday assessing the defeat in the July Senate elections, while not directly naming Shigeru Ishiba, has triggered the resignation of several senior members, paving the way for a leadership change within the party Foresight Japan's political analyst Tobias Harris pointed out that this report increases the possibility of the Liberal Democratic Party dismissing Shigeru Ishiba. Traders in Tokyo indicated that the market is concerned that a new prime minister succeeding Ishiba may implement a more populist agenda, including increasing government spending and pressuring the Bank of Japan to halt interest rate hikes.

Stephen Spratt, a rate strategist at Société Générale for the Asia-Pacific region, analyzed that the market is weighing two possibilities: either Ishiba will launch a generous spending plan to win back party supporters, or a new leader will implement expansionary fiscal policies after taking office. He summarized:

“In either case, the market believes that fiscal policy will become more accommodative, and currently, the market does not want to see more fiscal spending.”

Key Auction Approaches, Investor Confidence Under Pressure

The next focus for the market will be the 30-year Japanese government bond auction held this Thursday. This auction is seen as a critical test of investor confidence, with global markets closely monitoring its outcome to assess whether the turmoil will spill over from Tokyo to other markets.

Although demand for Tuesday's 10-year government bond auction was robust, providing some comfort, investor demand for recent Japanese debt auctions has been weak or inconsistent. Since May of this year, institutional investors, including Japanese life insurance companies, have begun to favor shorter-term sovereign debt, leading to a continued lack of interest in purchasing long-term government bonds.

Investor sentiment is evidently cautious. Rajeev De Mello, global macro portfolio manager at Gama Asset Management, expressed being “very cautious” about Thursday's 30-year government bond auction. He stated:

“As a bond investor, I am reducing my duration in Japan and avoiding long bonds across all global markets.”

Strategist Mark Cranfield also warned that against the backdrop of increasing global debt concerns, this auction will be “a very difficult sale.” He pointed out that as the yield on 30-year Japanese bonds breaks through the 3.0% and 3.25% thresholds, fixed-income investors will view 3.5% as the next relative value level, considering “this is a sell-off with almost no obvious slowdown ahead.”

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