Concerns over fiscal expansion trigger a sharp sell-off of Japanese long-term bonds, with the 20-year yield soaring to its highest level since 1999
Japanese long-term government bonds have faced significant selling pressure due to fiscal concerns, with the 20-year yield rising to a 25-year high, and the 30-year and 40-year yields also increasing. The market is wary of the scale of the stimulus plan that the high municipal government is about to announce, fearing that additional budgets will raise bond issuance demand and restart fiscal risk premiums. Investors are closely watching this week's 20-year government bond auction
Due to growing concerns about Japan's fiscal situation, Japanese long-term government bonds faced a fierce sell-off on Monday, pushing the 20-year bond yield to its highest point in 25 years.
Meanwhile, the 30-year bond yield rose by 5 basis points to 3.26%, and the 40-year bond yield increased by 5.5 basis points to 3.6%. This trend echoes the significant declines in bonds in the U.S. and U.K. markets late last week, indicating a heightened sensitivity among global investors to government fiscal discipline.
Currently, traders are focusing on the actual scale of spending in Prime Minister Fumio Kishida's economic plan. Although the GDP data released on Monday indicated an economic contraction, providing justification for Kishida to introduce a stimulus plan, the market remains wary of the government potentially relying more heavily on fiscal policy to support growth.
The decline in government bonds highlights the delicate balance policymakers face: on one hand, there is a need to boost the sluggish economy through fiscal spending, while on the other hand, there are concerns about fiscal sustainability in the market, compounded by the Bank of Japan's plans to raise interest rates in the coming months, making the policy environment more complex.
Focus on Stimulus Plan Scale, Fiscal Risk Premium Resurfaces
The core uncertainty driving this round of sell-offs lies in the specific scale of the economic stimulus plan that the Japanese government is about to announce. According to Japanese media reports, Kishida's government is considering drafting an additional budget that could exceed last year's level of 13.9 trillion yen.
"Investors are cautious about the scale of the government's economic stimulus plan," said Naoya Hasegawa, chief bond strategist at Okasan Securities:
"The uncertainty regarding the impact of the plan on government bond issuance is putting pressure on long-term bonds."
Market analysis suggests that concerns about Japan's fiscal situation are leading to a resurgence of risk premiums. Goldman Sachs noted in a report that as investors become increasingly wary of a stimulus plan that exceeds expectations, Japan's fiscal risk premium is rising, putting pressure on long-term sovereign bonds and the yen. This trend reflects Kishida's implementation of a so-called "responsible expansionary fiscal" policy, indicating her readiness to rely more on fiscal policy to support economic growth.
The current political backdrop and market sentiment have made investors increasingly anxious about the upcoming 20-year government bond auction scheduled for Wednesday. Market participants will closely monitor the results of this auction to gauge the strength of demand for Japanese long-term government bonds after the surge in yields. If the auction results are poor, it could further exacerbate selling pressure in the market
