$280 million ignites a "Tesla moment" in Japan's ultra-long-term bond market.

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A trading volume of just $280 million is enough to push Japan's massive $7.2 trillion government bond market to the brink of collapse, sending strong shockwaves to global financial markets.

On Tuesday, Japan's benchmark super-long-term government bonds plummeted in price, and the $280 million figure was the total transaction amount for these super-long-term bonds on that day:

According to data from Japan Bond Trading Co., on Tuesday the most closely watched 30-year government bond saw a trading volume of only $170 million, while another $110 million of 40-year bonds changed hands.

Although this volume is higher than in recent trading days, it is only a drop in the bucket compared to the $41 billion traded that day in Japanese 10-year government bond futures.

The numbers above do not cover all Japanese government bond transactions for Tuesday. There are also so-called "off-the-run bonds" trades in the market, but with much lower liquidity; some investors also bet on interest rate trends through rate swaps.

The 30-year and 40-year government bonds were the hardest hit in Tuesday's trading session. Several market participants described it as the most chaotic trading in recent years. During the sell-off, yields on both types of bonds briefly surged more than 25 basis points, but the market has gradually calmed since then.

This sell-off sent yields to historical highs, sparking concerns that Japan may face a "Truss moment" and even prompted U.S. Treasury Secretary Scott Bessent to seek an explanation, calling the volatility a "six standard deviation event."

Japan's traders and analysts are still unclear about exactly who was selling, with market rumors pointing to primary dealers, hedge funds, and domestic life insurance firms.

But the macro reasons behind the turmoil are relatively clear: Japan is adapting to higher inflation levels, and rising interest rates are shattering years of market calm. In addition, Prime Minister Sanae Takaichi's proposal to suspend the food and beverage consumption tax, seen as a move to gain support ahead of a possible early election next month, has heightened fiscal policy concerns.

What do analysts think?

Analysts point out that the huge gap between the scale of market value evaporation and the actual trading amount highlights the vulnerability of liquidity in the Japanese bond market, which is gradually becoming a weak link in the global financial system. For years, Japan's government debt market—the world's third largest—has been relatively stable under the influence of large-scale stimulus from the Bank of Japan; but as the central bank and domestic life insurers gradually step back, the market has become far more sensitive to shocks.

Mizuho Securities Tokyo chief trading strategist Shoki Omori said: "This is not contradictory. In a market lacking depth, where dealers' balance sheets are limited and prices are set by marginal trades rather than volume-weighted averages, such situations are to be expected."

A Bloomberg index shows that the deviation between Japanese government bond yields and their theoretical value surged to a historical high this week, indicating that market dislocation is intensifying.

Investors are now forced to adapt to historic changes in how Japanese government bonds trade.

J.P. Morgan analysts pointed out in a report this week that the "market breadth" indicator for price volatility relative to trading volume has deteriorated rapidly. This means that even relatively modest capital flows can have a massive impact on super-long-term bond prices—a sharp contrast to the still robust market breadth seen in U.S. and German government bonds.

According to data from the Japan Securities Dealers Association, foreign investors now account for roughly 65% of Japan's monthly cash government bond trading volume, compared to just 12% in 2009. What used to be a market dominated by Japanese life insurers is increasingly being dictated by investors with much shorter holding cycles.

Moody’s Analytics senior economist Stefan Angrick said: "This is not just a problem that Japan faces; the United States faces similar conditions. Nowadays, the US Treasury market is also dominated by faster-moving investors, rather than the long-term holders of the past. This situation will persist for some time."

As of late Thursday Asian trading session, signs of stabilization have emerged in the market. The 30-year bond yield has retreated about 5 basis points to 3.66%, but remains above Monday’s closing level.

Traders will closely watch Friday's Bank of Japan policy decision, any statements by Governor Kazuo Ueda, as well as next week's 40-year Japanese government bond auction.

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