Japan’s bonds are the latest to succumb to a global debt selloff as traders unwind bets for aggressive US interest-rate cuts.
Yields on Japan’s 40-year government debt rose to a 16-year high on Wednesday (Oct 23), a day after their 10-year Treasury peers climbed past 4.2 per cent for the first time since July. The losses, which have spread to German securities and Asian notes, bring a gauge of total return in US sovereign bonds closer to erasing its gains for the year.
Bond traders everywhere are scrambling to reassess their positions as the US economy’s strength and the growing prospect of a Donald Trump election victory undermine the case for aggressive easing. Uncertainties surrounding Japan’s upcoming lower house election and expectations for further Bank of Japan policy normalisation are also contributing to the run-up in yields.
“Traders are still trying to figure out the Fed’s path and that’s triggering jitters everywhere – including Japan,” said Shoki Omori, chief desk strategist at Mizuho Securities. “The prospect of elevated US rates is a real risk, which will have ramifications across global rates.”
Japan’s 40-year yields advanced 1.5 basis points to 2.535 per cent in early trading, the highest since August 2008. Yields on 10-year Australian debt touched a five-month high while those on similar-maturity New Zealand notes climbed to the highest since July.
Fed officials this week sounded a cautious tone over the pace of future rate cuts after economic data showed that hiring over the past three months was stronger than initially expected. The prospect of bigger fiscal deficits after the upcoming US presidential election is driving up yields.
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With global bonds under pressure, “there is still a risk of yields rising in Japan,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management. He added that the yen’s weakness is adding to the case for BOJ rate hikes, and helping to push up bond yields.
Although the central bank is widely expected to keep its benchmark rate at 0.25 per cent at a meeting this month, swap markets are signalling expectations that there’s a roughly 67 per cent chance of a quarter-percentage-point rate hike by January.
Japanese yields are also rising on the back of uncertainty surrounding the government’s finances, as well as a lower house election this weekend.
If the ruling Liberal Democratic Party and its long-running coalition partner Komeito fail to secure a majority in the polls, political uncertainties will increase, and “the pressure to expand the budget will increase,” said Yusuke Ikawa, market strategist at BNP Paribas Securities Japan. BLOOMBERG
