The benchmark 10-year yield has risen 15 basis points in two sessions and nearly 25 basis points since rumors of elections in Japan emerged earlier this month.
The thirty-year interest rate has risen by 29 basis points in two days. Bond yields move in the opposite direction to prices. Here’s what market participants are saying about the sell-off:
NAKA MATSUZAWA, CHIEF MACRO STRATEGIST, NOMURA SECURITIES, TOKYO:
“It’s all fear of (Japanese Prime Minister Sanae) Takaichi’s reflationary policies and especially the consumption tax cuts because she was unclear about the timing and the way she finances that.
‘That worsens and prolongs the fear. It’s a shock event and (could continue) unless Takaichi becomes more realistic and the market calms down… in the elections that’s quite unlikely.
“The bottom line is that no one wants to buy or catch the falling knife right now. There are no buyers at the market level.”
SHUICHI OSAKI, SENIOR PORTFOLIO MANAGER OF FIXED INCOME DEPARTMENT, MEIJI YASUDA ASSET MANAGEMENT, TOKYO:
“Japanese government bond yields are often sold off during election campaign periods. There is a risk of a sell-off by foreigners in the future as they have become major players in super-long Japanese government bonds. There are concerns about who would buy them if foreign investors sell them.”
IICHIRO MIURA, SENIOR GENERAL MANAGER OF INVESTMENTS AT NISSAY ASSET MANAGEMENT, TOKYO:
“Today’s weak auction of 20-year bonds has led to a further sell-off in Japanese government bonds. The market was already concerned about the deteriorating government finances. Whoever wins the upcoming elections, spending is expected to rise.
“Additionally, lifers may be selling more super-long JGBs, around 15 to 20 years, as returns have risen above their expectations. Before the end of their financial year, they may consider selling those bonds to limit unrealized losses.
“The market is now lost, market players do not know at what level to buy JGBs.”
KYLE RODDA, SENIOR MARKET ANALYST, CAPITAL.COM, MELBOURNE:
“The market has a lot to price in. Political uncertainty, the fiscal outlook and inflation expectations, volatility rushing into the BOJ. Given the policy settings alone, it’s not surprising that we’re seeing downward pressure on government bond prices. The looming election only adds to the headwinds.”
BEN BENNETT, HEAD OF INVESTMENT STRATEGY ASIA, L&G ASSET MANAGEMENT, HONG KONG:
‘We think JGBs look attractive, but you need to respect the significant market volatility and keep positions relatively light. I suspect part of this move is due to investors being held back or forced to reduce their exposure due to volatility.
“But fundamentally, you can argue that this move is overdone. Yield curves are very steep, which suggests that Japanese yields will have to rise significantly in the future. That may well be the case, but it will take inflation and growth to maintain high levels, which is quite a high bar… but as I said, it is difficult to oppose this move at the moment given the high volatility.”
CHARU CHANANA, CHIEF INVESTMENT STRATEGIST, SAXO, SINGAPORE:
“The soft demand at the 20-year JGB auction is the market asking for a larger ‘fiscal premium’. With early elections looming, investors are less confident in medium-term fiscal discipline, and so they are demanding more term premiums to lock in long-term risk in Japan.
“That’s why the long end is driving rates higher and steepening the curve. It’s not a growth story, it’s debt/supply plus political uncertainty being priced in.”
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