The Zhitong Finance App learned that on Tuesday, the yield on Japanese treasury bonds soared across the board. The yield on the benchmark 10-year treasury bond hit the 3% mark for the first time since 1996. The 5-year yield hit a new high of 2.26%, and the 2-year yield rose to a 31-year high of 1.795%.
The global bond market was simultaneously under pressure. The 10-year yield on US bonds rose to 4.786% during the Tokyo trading session, the highest level since January last year, and the Australian 10-year yield recorded the biggest one-day increase in five months. European treasury yields also climbed, with German 10-year bond yields rising to 3.34%, the highest level since 2011.
This round of sharp sell-off coincided with another escalation of the situation in the Middle East. Another military conflict broke out between the US and Iran, pushing Brent crude oil futures back above 91 US dollars per barrel, and concerns about inflation have made a comeback. Inflationary pressure, fiscal concerns, and expectations of interest rate hikes are being profoundly reshaped the global bond market pattern.
The yield on Japanese treasury bonds has been low for a long time. It can be called the “ballast stone” of the global bond market, which continues to suppress financing costs for governments. Today, this “ballast stone” is at the forefront of change. Is the return of the 10-year Japanese bond yield to 3% just the only way to normalize interest rates, or is it a harbinger of deep fission in the global fixed income market? A number of market experts have explained this.
Here's what market analysts say:
Tai Hui, Asia Pacific Chief Market Strategist at J.P. Morgan Asset Management:
“As the fourth quarter approaches, the Middle East impasse is likely to drive up energy prices. Before winter in the northern hemisphere, falling fuel stocks and seasonal demand recovery mean that global inflation will face direct upward pressure. Furthermore, the US government's sanctions against Iran's trading partners and a new round of tariff threats may all be triggers for rapid price increases.”
Fred Neumann, Asia's Chief Economist at HSBC:
“The rise in Japanese treasury yields not only reflects investors' concerns about Japan's fiscal outlook, but also the pressure on global long-term financing costs. The Japanese government has hinted that it will launch an ambitious spending plan in the next few years. Long-term financing costs are rising in many developed markets as public and private sector borrowing demand is increasing. Seen from this perspective, the rise in Japanese treasury bond yields is not an isolated phenomenon, but since Japan's stock of public debt is larger, the pressure to face rising debt repayment costs may be more prominent.”
Shigeto Nagai, Head of Japanese Economics at the Oxford Institute of Economics:
“The rise in long-term interest rates is driven by multiple factors, including global inflation concerns that have heightened expectations of interest rate hikes and concerns about the fiscal sustainability of major developed economies. It is misleading to view rising interest rates only from the perspective of a single economy. Major economies' concerns about long-term interest rate trends are being transmitted to each other and resonate across borders, eventually forming a pattern where global interest rates are rising at the same time.”
Vasu Menon, Managing Director of Investment Strategy at OCBC Bank:
“This is not good news for Japan's public finance. Higher financing costs will increase the burden of interest payments on Japan's huge treasury bonds, and the share of fiscal revenue used to pay interest will continue to rise, which may limit government spending space. From a market perspective, rising yields on Japanese treasury bonds may prompt Japanese investors to sell off overseas assets and repatriate capital, thus putting some downward pressure on overseas markets. At the same time, Japan's reduced demand for foreign bonds may push up treasury bond yields in major markets such as the US and Europe, which will have a potential impact on both fiscal and monetary policies.”
Masahiko Loo, senior fixed income strategist at State Street Global Investments Management in Tokyo:
“The 3% yield on 10-year Japanese bonds is certainly a milestone, but I prefer to see it as a normalization process rather than a sign of crisis. The market is repricing expectations for a higher inflationary environment, higher interest rates, and further interest rate hikes by the Bank of Japan. Bond investors are paying attention to factors such as inflation risk, large-scale supply, and revaluation of term premiums.
The impact of the escalating situation in the Middle East on the market is more reflected in the fact that the recovery in oil prices has increased the sticky risk of winter inflation rather than geopolitics itself. Furthermore, the Japanese factor should not be underestimated. The point is not a large-scale return of Japanese capital, but rather that Japan is no longer acting as a marginal buyer of foreign bonds as it was in the past. As one of the world's largest savings pools, declining incremental demand in Japan is driving up global bond maturity premiums. This is why this round of sell-off is more like a 'buyer's strike' than a 'seller panic'. “Bond investors' concerns about economic growth have abated, and are instead focusing more on inflation and supply factors.”
Andrew Lilley, Barrenjoey's Chief Interest Rate Strategist:
“This round of sell-off is due in large part to a reassessment of the Federal Reserve's policy. I think the Federal Reserve will raise interest rates in September, and this is the beginning of a cycle of at least three rate hikes. If the Federal Reserve doesn't raise interest rates, term premiums will have to rise... This dynamic indicates that policy may have lagged behind the situation, which is not a good situation. No central bank wants to fall into such a state: if you don't tighten interest rates, the market will complete half of the contraction for you, just because the market thinks you are facing a major risk.”
Ryutaro Kimura, senior fixed income strategist at Paris Asset Management, France:
“So far, as interest rates rise, the bond market has warned to some extent about fiscal expansion. The US government is actually calling on Japan to change Abenomics's course and change its expansionary fiscal policy to a certain extent. Despite this, the Japanese government's budget for the next fiscal year will expand drastically. From the perspective of the bond market, the market has developed a kind of helpless or even fateful mentality about rising interest rates.
On the other hand, 3% is a psychological barrier and may stimulate some buying. The 10-year Japanese treasury bond auction attracted a large number of bids, so the yield is likely to move sideways around this level in the short term. Once this part of demand is met, we need to be wary that upward pressure on yields may increase further.”
SBI Securities Chief Bond Strategist Eiji Doke:
“Japan's long-term yield hit 3%, which is probably just a halfway point. The market expects the Bank of Japan to raise interest rates, which will mainly put upward pressure on short- and medium-term yields; concerns about fiscal policy may put a lot of pressure on the ultra-long-term bond market. Long-term bonds in between are facing upward pressure on yields from both directions.”
Prashant Newnaha, senior interest rate strategist at TD Securities:
“It's a real narrative shift. Japanese treasury bonds have long been the “ballast stone” of the global fixed income market, but now the situation has completely reversed. If the sell-off in Japanese treasury bonds continues, it could trigger a repricing in the global fixed income market.
Although the market's focus is on monetary policy and the Bank of Japan's interest rate hike path, rising 10-year yields to 3% may once again draw the market's attention to fiscal policy. More broadly, a further rise in Japanese bond yields will reduce the appeal of arbitrage trading and may drive the gradual reallocation of capital to Japanese assets.”
According to various opinions, Japan's 10-year treasury bond yield exceeding 3% is not only a result of the resonance of global inflation and interest rate hikes, but also reflects the market's deep concerns about the fiscal sustainability of major economies. This milestone could mean that the global bond market is entering a new pricing paradigm.