Japan's 10-Year Bond Yields Hit Highest Level Since 2008; Analysts Bearish on JGB Outlook Amid Global Long Bond Decline

TradingKey - Japan's government bonds are under sell-off pressure due to market concerns over political uncertainty and fiscal spending. On Tuesday, July 15, the yield on the 10-year bond surged to 1.595%, marking its highest point since 2008. Meanwhile, the 20-year yield rose to 2.645%, and the 30-year yield climbed to 3.2%, both reaching their highest levels since 1999.

Analysts suggest that the soaring yields on Japanese bonds may reflect market anxieties over Japan’s fiscal health and the impact of U.S. tariff policies. Additionally, the upcoming Senate election on Sunday, July 20, could further influence Japan's bond market. 

Polls indicate a decline in the ruling coalition's projected seat count. Some analysts note that if the coalition loses and a new government advocating more expansionary fiscal policies comes to power, overseas investors may hasten the sell-off of super-long JGBs, potentially driving yields even higher. Moreover, welfare policies promised by political parties during the election campaign, such as subsidies and tax cuts, could exacerbate Japan's precarious fiscal situation.

A Global Bond Market Storm Resurfaces

Indeed, Japanese government bonds are not the only ones plummeting. According to Bloomberg, global long-term government bonds are dropping as investors worry that government spending is outstripping their capacities. 

Unlike short-term bonds that are more susceptible to policy changes, the rising long-term yields reflect market fears about the "ballooning" of global sovereign debt. George Bory, chief investment strategist at Allspring Global Investments, pointed out that government deficit spending is prevalent worldwide, with the long end of the yield curve serving as the release valve.

Germany's 30-year bond yield is nearing its highest level in 14 years, while the bond markets in the United States, the United Kingdom, and France are also under similar selling pressure. 

Moreover, volatility in the bond market could trigger a "chain reaction" across markets. For example, a report by BCA Research warns that Japan is a crucial source of global liquidity, and changes in JGB yields could pose significant threats to U.S. tech stocks. The report highlights that the high valuations of U.S. tech stocks are not solely based on domestic liquidity but also rely on the low-cost funding environment provided by Japan. If JGB yields surge, prompting capital to withdraw from U.S. stocks and return to Japan, U.S. tech stocks could face downward valuation pressure.

As of the time of writing, the yields on long-term JGBs have slightly retreated from earlier in the day, with the market closely monitoring Sunday's election.