Japan’s Long Bonds Carry More Risk Than U.S. or European Debt as a Crucial Test Is Coming

TradingKey - On Tuesday, long-term government bonds in the U.S., the U.K., and other developed nations faced a wave of heavy selling, pushing 30-year yields to multi-decade highs. Japan’s 30-year bond yield also hit a record high. Compared to Western economies, political turmoil in Japan adds an additional layer of pressure on its bond market, and Thursday’s 30-year JGB auction could become the “last straw” for investor confidence.

On Tuesday, September 2, the first trading day after the U.S. Labor Day holiday, the U.S. 30-year Treasury yield surged toward the key psychological level of 5%, while long-term government bond yields in the U.K., Italy, France, and other countries also spiked.

Analysts say this global sell-off in long-dated bonds is the result of multiple factors:

• A wave of corporate bond issuance
• Deep concerns over fiscal outlooks in advanced economies
• Seasonal liquidity tightening in the so-called “Black September”
• Spreading panic sentiment in global bond markets

According to Bloomberg, on Wednesday, Japan’s 30-year JGB yield rose 8.5 basis points to 3.285%, a new all-time high; the 40-year yield jumped 9 bps to 3.535%; and the 20-year yield hit its highest level since 1999. 

As of writing, the 30-year JGB yield has risen to 3.292%, indicating that selling pressure in the long-end remains intense.

Beyond these global factors, Japan’s political risks are further weighing on its bond market. According to Kyodo News on Tuesday, Hiroshi Moriyama, the secretary-general of Prime Minister Shigeru Ishiba’s ruling coalition, said he plans to resign to take responsibility for the coalition’s defeat in the July upper house election.

Additionally, several key figures — including Shunichi Suzuki, LDP Secretary-General, and Itsunori Onodera, head of the election strategy committee — have also expressed intentions to step down.

Losing key allies could weaken Ishiba’s position within the LDP. Although there have been calls for him to resign, he had previously insisted on staying in office. 

However, on Tuesday, Ishiba changed his tone, saying he has no intention of clinging to power, will not shirk responsibility, and will make the right decision at the right time.

The potential for an early election in Japan’s ruling party adds uncertainty to the country’s fiscal outlook. Analysts say that amid global fiscal concerns driving bond sell-offs and steepening yield curves, investor caution around Thursday’s 30-year JGB auction, combined with intra-party instability, is increasing selling pressure on ultra-long bonds.

Although Tuesday’s 10-year JGB auction delivered unexpectedly strong results, the 30-year auction on Thursday appears highly vulnerable in this sensitive environment. Many market participants say they are avoiding long-dated bonds across regions and preparing for an even steeper yield curve.

Bloomberg analysts expect that the sell-off in Japan’s long-term bond market shows no clear signs of slowing, and fixed-income investors are now eyeing 3.5% as the next target for the 30-year JGB yield.