Japanese bonds recover slightly after record slump as unrealized losses surge

Japanese government bonds edged up slightly on Friday, clawing back ground after a brutal week that saw yields on long-term debt hit historic highs.

The rebound followed five straight days of selloffs, driven by inflation concerns, weak investor appetite, and rising anxiety over Japan’s ballooning fiscal deficit.

According to Reuters, the chaos in the bond market started after data showed core consumer inflation in April surged to 3.5%—the highest in over two years—piling pressure on the Bank of Japan to stay aggressive with rate hikes.

The most dramatic damage hit the 20, 30, and 40 year segments. Traders dumped these ultra-long Japanese government bonds as lawmakers pushed for consumption tax cuts, a move many saw as reckless in the face of growing public debt.

Bond prices tanked. Yields, which move in the opposite direction, spiked across the board. On Wednesday, the 30-year JGB yield hit a record 3.185% before slipping back to 3.115% by Friday. The 40-year yield, which touched 3.675% on Thursday, retreated to 3.6%.

BOJ reacts as ultra-long yields spiral

Governor Kazuo Ueda broke silence on Thursday, telling reporters the central bank would monitor the situation closely. He didn’t announce any direct action, but markets took his words as a warning. 

A 20-year bond auction on Tuesday failed to attract strong bids, adding to fears the market can’t absorb the mountain of debt the government needs to sell. Investors seem tapped out.

The words from Mizuho analysts on Friday summed it up: “The risk of JGBs becoming ‘indigestible’ in the ultra-long term zone remains.” They added that the government might have no choice but to cut back on longer-dated issuance to avoid further disruptions.

But even with Friday’s recovery, there’s no sense of relief. Japan is scheduled to auction 40-year bonds again next week. Nobody wants to hold the bag if yields spike further.

Shorter-term bonds also moved. The 10-year benchmark JGB yield fell slightly by 1.5 basis points to 1.545%. Two-year and five-year bonds also saw small drops in yield. Those declines followed a broader global move after US Treasuries rallied late in the week. But that didn’t convince anyone in Tokyo that the worst is over.

Nippon Life, others report heavy losses

The pressure is already visible in Japan’s financial institutions. On Friday, Nippon Life Insurance Co. reported that unrealized losses on its Japanese bond portfolio more than tripled in the fiscal year that ended in March.

The company said the paper losses totaled ¥3.6 trillion, or roughly $25 billion, up from the previous year as rising interest rates crushed the value of its holdings.

Nippon Life had warned last month it planned to cut back on sovereign debt purchases. Now it’s clear why. Its portfolio is packed with long-duration bonds, mostly 30-year JGBs—the same ones investors rushed to sell this week. The insurer also confirmed it took ¥500 billion in actual realized losses from selling Japanese government bonds during the last fiscal year.

Other financial institutions are also getting hit. Norinchukin Bank said Thursday it would be “very cautious” about buying government debt from now on. Sony Life Insurance Co. announced it may start selling some of its bond holdings if domestic rates keep rising. They’re all taking cover before the next hit.

Even Nippon Life’s approach has changed. While it ramped up purchases back in April, it now plans to slow things down and reduce its overall bond holdings on a book value basis. They aren’t saying it outright, but the message is clear: these yields are too hot to handle.

Long-term crypto trader and hypeman Arthur Hayes took to X to comment on Nippon’s decision, saying, “When the life insurers, who by law can pretty much only buy govt bonds, are getting smoked and need to pull back, the bond market is F**KED. The BOJ is on notice. It’s only a matter of time before they slam even harder in the fiat printing button.”