Global Bond Selloff Spreads Widely, Japan’s 10-Year Yield Surges to 2.8%

The global bond selloff keeps spreading. On Monday, Japan’s 10-year government bond yield jumped 10 basis points to 2.8%, marking far more than a regional market disturbance.

source：trading eco

The bond rout that first broke out in Japan has swept across global markets. The yield on US 30-year Treasury bonds closed at 5.12% last week, hitting the highest level since July 2007. UK 30-year bond yields soared around 20 basis points in a single day, touching a peak unseen since 1998. Long-dated bond yields in Germany, Spain and Australia also moved higher in tandem.

 source：trading eco

Naka Matsuzawa, strategist at Nomura, delivered a clear market judgment. The previous two rounds of Japan’s "bond vigilante" alerts were both driven by domestic factors, triggered respectively after the new administration took office and when food tax cut proposals emerged. This round is totally different, with external factors acting as the main catalysts. Escalating tensions in Iran have lifted oil prices, expectations for Fed rate cuts have faded completely, and political risks in the UK have flared up again. Overseas investors are accelerating their exits from Japanese government bonds.

More importantly, selling pressure has shifted from ultra-long maturities mainly affected by supply and demand to the 10-year yield, which directly mirrors market estimates of the neutral interest rate.

Fiscal concerns have added further downward pressure. Media reports that the Japanese government may draw up supplementary budgets triggered the latest wave of bond selling. Though Japanese Finance Minister Ayuko Kato ruled out the need for immediate supplementary budgets, market sentiment has already been damaged. Discussions over food tax reductions are ongoing and energy subsidy plans are under discussion, building up mounting pressure for fiscal expansion.

Meanwhile, Japan’s 10-year breakeven inflation rate has climbed to 2.15%. Rising inflation is no longer merely driven by oil price hikes. Market doubts are growing over whether the Bank of Japan can anchor inflation steadily around its 2% target. Higher inflation expectations have pushed up neutral rate projections, putting firm upward pressure on 10-year bond yields.

Priya Misra from JPMorgan Asset Management described the current situation as a perfect storm.

"The past week has been a perfect storm for the rates market — higher inflation prints, coupled with a global rates move led by JGBs and Gilts. This rise in rates will start to tighten financial conditions as the economy deals with ongoing energy shocks."

Japanese bonds are undergoing drastic repricing. Traders no longer view elevated inflation as a temporary phenomenon, nor do they believe central banks can cap bond yields easily. Market participants have started to worry about fiscal credibility to an extent rarely seen in years.