Japanese Long-term Bonds Plunge... 20-year Yield Hits 25-year High

Demand for Bonds Weakens Due to Fiscal Spending Demands Before House of Councillors Election

"Upward Pressure Expected to Continue for the Time Being"

On the 19th (local time), U.S. long-term bonds plunged but recovered, and on the 20th (local time), Japanese long-term bonds fell to their lowest level in 25 years.

According to foreign media such as Reuters News on the 20th (local time), Japan's 20-year bond yield surged 15 basis points (1bp=0.01%) to 2.555% at one point. This is the highest level in 25 years since 2000. The 30-year bond yield also jumped to 3.14%, marking a record high. Bond yields and prices move in opposite directions.

The surge in yields on Japanese long-term bonds reflects a weakening demand for Japanese bonds. Within Japan, there is increasing political pressure for large-scale fiscal spending ahead of the House of Councillors election scheduled for July, leading to predictions of increased bond sales.

Hirofumi Suzuki, chief currency strategist at Sumitomo Mitsui Banking Corporation, said that Japanese bonds are no exception to the global trend of rising yields and expected "upward pressure to continue for the time being."

The Bank of Japan announced that some market participants urged the Bank of Japan to increase purchases of ultra-long-term bonds or end tapering for those maturities as bond yields surged that day. Tapering refers to the reduction in the pace of liquidity provision as the economy recovers after being boosted for economic stimulus.

The Bank of Japan has been supplying liquidity through quantitative easing (QE) while implementing large-scale economic stimulus measures over a decade during the economic downturn, and only ended the stimulus measures last year. Although it ended negative interest rates last year, short-term borrowing rates remain significantly lower at 0.5% compared to other countries.

U.S. long-term bonds, which plunged the previous day, quickly recovered and the surge in yields subsided. However, the surge in yields on Japanese long-term bonds is interpreted as a signal that market anxiety is more widespread.

The 30-year U.S. bond yield, which hit an 18-year high in the morning of the previous day due to the impact of Moody's credit rating downgrade, quickly fell from a peak of 5.037% to 4.91%, similar to the previous session. The 10-year U.S. bond yield also recorded 4.56% before falling to 4.44%.

Mohit Kumar, chief European economist at Jefferies, said, "The impact of the credit rating downgrade was expected to be limited, but the quick recovery of U.S. bonds was somewhat surprising." He added that given the chronic national debt and fiscal deficit concerns in the U.S., the credit rating downgrade was not unexpected.

Guest reporter Kim Jung-ah kja@hankyung.com