"Weakness in Japanese long-term government bonds pressures weakness in US and other long-term government bonds"

"When JGBs rise 10bp, US Treasuries face 2–3bp upward pressure"

Reflecting concerns over fiscal deterioration and rising inflation risks

With Sanae Takaichi elected as leader of the Liberal Democratic Party, volatility in Japan's long-term government bonds has increased, and it is analyzed that this will affect the bond markets of the US, the UK and others.

On the 6th (local time), Goldman Sachs strategists cited by Bloomberg pointed out that Takaichi's election poses a risk of raising Japan's long-term government bond yields. They said, "Each time an idiosyncratic shock of 10 basis points (1bp=0.01%) occurs in Japanese government bonds (JGBs), an upward pressure of about 2–3bp on the government bond yields of the US, Germany and the UK is expected."

Movements in Japanese government bonds have foreshadowed global government bond movements this year. The surge in ultra-long Japanese government bond yields reflects concerns about widening fiscal deficits of governments and expectations of inflationary pressures.

Goldman Sachs strategists noted, "Japan has exported weakness shocks to global long-term rates this year." They emphasized, "With Ms. Takaichi's election as LDP president, long-term government bond yields are expected to rise and the yield curve to steepen."

On the 6th, the yield on Japan's 40-year government bond jumped 14bp. Investors expect that President Takaichi's support for stimulus measures will lead authorities to issue and sell more government bonds to finance household tax cuts and stimulus. On that day, the US 10-year Treasury yield rose 2–3bp in European trading.

Goldman Sachs' strategists added that whether the sell-off in long-term bonds will persist depends on the political situation.

Goldman Sachs' strategists said, "The long-term government bond yield curve has recently detached from typical cyclical factors." Accordingly, they predicted, "As uncertainty about governments' fiscal policies increases, the risk premium on long-term government bonds is likely to remain higher for the time being."

Contributing reporter Kim Jeong-a kja@hankyung.com