Global bond selloff

☕ TL;DR

  • Record Highs: Japan’s 40-year JGB yield hit 4.213%, a historic high.
  • The Trigger: PM Takaichi called a Feb 8 snap election, floating food sales tax cuts.
  • The Risk: Fiscal looseness in Japan adds to the global “living deficit” anxiety.

The Signal: JGB Yields Break Out 📈

The calm in Japanese bond markets has officially broken. The 40-year JGB yield surged to a record 4.213%, while the 10-year yield touched levels not seen since 1999 (2.38%).

This isn’t a technical glitch. It’s a repricing of risk following Prime Minister Sanae Takaichi’s announcement to dissolve parliament and hold a snap election on February 8.

The Analysis: Politics vs. Fiscal Reality ⚖️

The selloff is driven by two converging forces:

  1. Election Economics: Takaichi’s campaign focuses on economic policy, specifically proposed cuts to the food sales tax. While popular with voters, this implies a wider fiscal deficit for a country already grappling with a massive debt load.
  2. Global Debt Overhang: This is happening against a backdrop where global debt remains above 235% of world GDP.

Investors are demanding a higher premium to hold long-dated government paper, fearing that populist measures will exacerbate the “living deficit” problem. With geopolitical instability necessitating higher defense spending globally, the supply of government bonds is set to increase, putting further upward pressure on yields.

The Verdict: Watch Capital Flows 🌐

Japan is the world’s largest creditor nation. When domestic yields rise, the incentive for Japanese institutions to recycle capital into U.S. Treasurys or European debt diminishes.

  • Macro Implication: A structurally higher JGB yield curve could reduce global liquidity, tightening financial conditions in the U.S. and Europe.
  • Strategy: Caution on long-duration sovereign bonds is warranted. The correlation between Japanese political instability and global yields is currently high.

My Take: The Feb 8 election is now a key macro event. If the ruling party secures a mandate for loose fiscal policy, expect the JGB selloff to deepen, testing the BOJ’s tolerance.

Disclaimer: This content is for informational purposes only and does not constitute financial advice.