Japanese Long-term Bond Yields Soar to 18-Year High, Government Acknowledges Deteriorating Finances, Experts Warn of Worsening Signs, Market Highly Concerned About Potential Impacts on Japan’s Economy and Global Capital Flows
(Background: Is Buffett Worried Too? Berkshire Hathaway Issues 90 Billion Yen Bond “Setting Historical Low Record,” Japanese Stock Index Plummets by 1,000 Points)
(Context: Rich Dad Warns “The End of the World Is Coming”: No Bidders at U.S. Treasury Auctions, Bitcoin Expected to Surge to $1 Million)
Japanese long-term bond yields surged significantly in May 2024, with the 40-year government bond yield rising by 6 basis points today (22nd) to reach its highest level since 2007, peaking at 3.675%. The yields on 30-year and 20-year bonds also hit or approached historical highs, signaling market expectations of a decline in government finances and repayment capacity. Experts have cautioned that this may lead to a perfect storm.
Reasons for the Yield Surge?
Japan began conducting new long-term government bond auctions on the 20th, covering 20-year, 30-year, and 40-year bonds. However, the sales results were dismal, triggering market panic. The bidding scale for the 20-year bonds was approximately 1 trillion yen, but the market did not respond favorably, with a bid-to-cover ratio of only 2.5 times and a tail spread reaching 1.14, marking the worst bond sale record since 1987.
The tail spread indicates the ratio of the average auction price to the lowest bid price. Now at 1.14, it reflects a market that no longer has willing participants to aggressively bid at high prices, leading to perceptions of increased risk and the potential for financial deterioration.
Firstly, the recent policy shift by the Bank of Japan (BoJ), gradually withdrawing from ultra-loose monetary policies and reducing bond purchases, has resulted in a decrease in large buyers who are less sensitive to price changes. It is reported that the Bank of Japan currently holds about 52% of the JGB market share.
Moreover, recent fiscal conditions in Japan have raised deep concerns, with growing anxieties about the sustainability of Japan’s finances. The debt-to-GDP ratio has exceeded 250%. According to Bloomberg, key political figure Shigeru Ishiba has openly opposed tax cuts and warned that:
The fiscal outlook is further complicated by the pressures of social welfare spending arising from an aging population.
Additionally, rising U.S. Treasury yields have put pressure on Japanese bond funds, leading to capital outflows.
Experts Warn: Steepening, Perfect Storm
Market experts have expressed widespread concern over the rapid rise in yields, believing this phenomenon significantly exacerbates Japan’s fiscal pressures. Given its extremely high debt burden, the continuously rising borrowing costs may force the government to face difficult choices between fiscal tightening and tax increases in the future.
Bank of America Securities has termed this rising situation as steepening, but in reality, the steepening state is a global trend, which is expected to bring higher inflation, economic growth, and government fiscal pressures:
“We believe the risks of steepening are more pronounced in the U.S., followed by Japan, the Eurozone, and the UK.”
Current market volatility has been described by some observers as a “perfect storm.” Sally Auld, Chief Economist at National Australia Bank (NAB), explained that rising inflation means the Bank of Japan may reduce bond purchases in the future, making the market more reliant on retail and institutional investors outside the central bank.
It feels as if the JGB market is facing a perfect storm, with overall investors more alert and cautious about the long end of the yield curve and rising premiums.
Naomi Fink, Global Chief Strategist at Nikko Asset Management, also warned of fiscal alerts from the Japanese government, but she believes the likelihood of massive capital flight from Japanese bonds is low, although adjustments in rising yields are expected.
Looking ahead, how effectively the Japanese government manages its enormous debt and the subsequent adjustments in the Bank of Japan’s monetary policy will be key determining factors influencing the Japanese bond market and global capital flows.
