Japan bond yields soar as election promises stir fiscal fears

Long-dated Japanese government bond (JGB) yields shot to record highs on Tuesday on concern that tax cuts touted across ‍the political spectrum ahead of a February election will test already strained government finances.

Demand fell at a 20-year debt auction and that seemed to open the ⁠floodgates and send yields into uncharted territory, with buyers scarce.

Benchmark 10-year yields are up 15 basis points in two sessions and nearly 25 bps since talk of an election in Japan swirled earlier in the month.


Thirty-year yields are up 29 bps in two days. Bond yields move inversely to prices. Here are what market participants ‌are saying about the ‌selloff:

NAKA MATSUZAWA, CHIEF MACRO STRATEGIST, NOMURA SECURITIES, TOKYO:

"It's all fear of (Japanese Prime Minister Sanae) Takaichi's reflationary policy and particularly on the consumption tax cuts, because she was ambiguous about timing and how ‌she finances it.

"That exacerbates the fear and prolongs it ... it's a shock-like event and (can continue) unless Takaichi starts to be more realistic and calm down the market ... into the election, that's rather unlikely.

"The bottom line is no one wants to buy or catch the falling knife at this point. There's no buyers on the level of the market."

SHUICHI OSAKI, SENIOR PORTFOLIO MANAGER OF THE FIXED-INCOME DEPARTMENT, MEIJI YASUDA ASSET MANAGEMENT, TOKYO:

"JGB yields tend to be sold off during the election campaign periods. There is a risk of a sell-off of foreigners in the future as they have become main players in super-long JGBs. There are concerns that who would be buying ‌them when foreign investors ‍are to sell them."

IICHIRO MIURA, SENIOR GENERAL MANAGER OF INVESTMENTS AT NISSAY ASSET MANAGEMENT, TOKYO:

"The weak 20-year bond ‍auction triggered a further sell-off of JGBs today. The market was already concerned about deteriorating ‌government finances. Whoever wins the upcoming election, the spending is expected to increase.

"On top of that, lifers may sell more of super-long JGBs, around 15-20 years, as the yields have risen beyond their expectations. Ahead of their financial year's end, they may consider selling those bonds to reduce unrealised losses.

"The market is now lost, market players do not know at which level they should buy JGBs."

KYLE RODDA, SENIOR MARKET ANALYST, CAPITAL.COM, MELBOURNE:

"The market has got a lot to price in. Political uncertainty, the fiscal outlook and inflation expectations, volatility heading into the BOJ. Given policy settings alone, it's not surprising we are seeing downward pressure on JGB prices. The looming elections only ‍add to the headwinds."

BEN BENNETT, HEAD OF INVESTMENT STRATEGY ASIA, L&G ASSET MANAGEMENT, HONG KONG:

"We think JGBs look attractive, but you have to respect the significant market volatility and keep positions relatively light. I suspect some of the ‍move is being ⁠driven by investors being stopped out or ⁠forced to reduce exposure because of the volatility.

"But fundamentally you can argue that the move is overdone. Yield curves are very steep, suggesting that Japanese rates will have to rise significantly in the future. That may well be the case, but it requires inflation and growth to maintain elevated levels, which is quite a high bar...but as I say, opposing the move is difficult right now given such high volatility."

CHARU CHANANA, CHIEF INVESTMENT STRATEGIST, SAXO, SINGAPORE:

"Soft demand at the 20-year JGB auction is the market asking for a bigger 'fiscal premium.' With snap elections in play, investors are less confident about medium-term budget discipline, so they demand more term premium to hold long-duration Japan risk.

"That's why the long end is leading yields higher and steepening the curve-it's not a growth boom story, it's debt/supply plus political uncertainty getting priced in."