High oil prices cast a shadow! Japan's 20-year government bond yield hits nearly 30-year high

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Oil prices, inflation, and geopolitics are jointly roiling Japan's bond market, which is now undergoing a storm.

On May 13, the yield on Japan's 20-year government bond rose 5 basis points to 3.498%, surpassing the previous high of 3.46% set on January 20, reaching its highest level since 1997. Yields on the 10-year and 30-year Japanese bonds also climbed at least 5 basis points, to 2.59% and 3.86% respectively.

The core logic behind this trend isn't complicated: High oil prices → increasing inflationary pressure → bondholders demand higher returns → yields rise. Behind this is a triple whammy—soaring risk of US-Iran ceasefire negotiations breaking down, US CPI data exceeding expectations, and political turmoil in the UK—all hitting the global bond market at once.

Triple Pressure Strikes Together

This round of yield increases is driven not by a single factor, but by multiple pressures stepping on the accelerator simultaneously.

First is oil prices. The US and Iran mutually rejected each other’s ceasefire proposals, with no resolution for the Middle East conflict in sight, so oil prices remain high. If oil prices don’t retreat, Japan’s inflationary pressure won’t fade—Japan is highly dependent on energy imports, so every rise in oil prices is directly transmitted to prices.

Second is the transmission of US Treasury pressures. The latest US inflation data exceeded expectations, causing the market to increase bets on future Fed rate hikes and pushing US Treasury yields higher. There is a linkage effect between US Treasuries and Japanese bonds; when US Treasuries rise, Japanese bonds cannot remain unaffected.

Third is the "negative demonstration" of UK bonds. UK long-term bonds have fallen due to political risk, and this negative sentiment has spilled over into Japan’s bond market.

Bloomberg market strategist Mark Cranfield commented: "Japanese government bond yields climbed on Wednesday, adding fuel to the already burning fire of G10 bond markets."

He also noted that in the next 24 hours or so, the market faces a 'double test' of 30-year government bond auctions—later today, there will be a US 30-year bond auction (the previous 10-year auction was dismal), and Thursday will be Japan’s turn. Bond auction results are often a barometer of market sentiment, and if demand is weak, yields may rise even further.

Yen Depreciation: 10 Trillion Intervention Still Can't Stop It

Behind rising yields, the yen’s performance is another key variable.

The yen has been weakening against the dollar recently. Despite several interventions by Japanese authorities, results have been limited. According to Bloomberg, quoting insiders and central bank account analysis, Japan intervened in the foreign exchange market from April 30 through Golden Week, with interventions totaling about 10 trillion yen (approx. $63.3 billion).

Nevertheless, the yen has still not stopped falling. Persistent tensions in the Middle East and Japan’s own fundamental pressures jointly weigh on the yen.

The weaker the yen, the higher the import cost, and the harder it is to control inflation. This makes Japan’s bond market woes worse—rising inflation means real returns on bonds are eroded, so investors demand higher yields as compensation.

"Upward Trend Is Already Established"

This round of rising yields in Japanese bonds is seen by market participants as more than just a short-term fluctuation.

Wee Khoon Chong, Senior Market Strategist for Asia-Pacific at BNY Mellon, said bluntly: "The upward trend in Japanese government bond yields is already established, driven by expectations of increased supply pressure from fiscal deficits, a weak yen, and persistently elevated commodity prices. These factors will likely continue to push up inflationary pressures in the future."

Worth noting, the 20-year Japanese government bond is a relatively illiquid instrument, with prices prone to large swings. In January this year, Japanese bonds experienced a dramatic selloff—triggered by market concerns over Prime Minister Sanae Takaichi’s fiscal policies, which eventually spilled over to the US Treasury market, attracting close attention from US Treasury Secretary Janet Yellen, with cross-market contagion risks entering the regulatory spotlight.

"NACHO Trade": Market Abandons Hope for Peace

Another key factor in this round of bond market turmoil is: oil prices.

US-Iran ceasefire talks have reached an impasse. According to the Global Times, Iran’s parliamentary speaker Kalibaf publicly stated on May 12 that the US "has no choice but to accept the rights of the Iranian people as set out in the 14-point plan," and that Iran’s armed forces are ready for any aggression. Trump responded that Iran's plan "is a pile of trash," failing to address the nuclear issue, and that the ceasefire agreement is "on the brink of collapse."

Last Thursday, US and Iranian forces exchanged fire in the Strait of Hormuz, with both sides accusing the other of provoking the conflict.

Against this backdrop, the front-month contract for WTI crude oil futures went back above $100 per barrel, while spot Brent crude clearly outperformed near-term futures, signaling tightening supply in the spot market.

Wall Street quickly developed a new trading narrative—"NACHO," the acronym for Not A Chance Hormuz Opens. eToro market analyst Zavier Wong said, "NACHO essentially means the market is abandoning hope for a quick solution."

This shift in expectations is reshaping market positions: the combination of long oil, short long-dated US Treasuries, and increased holdings in inflation-protected assets is gaining ever wider acceptance.

Bloomberg Economics’ Dina Esfandiary and Becca Wasser stated, "The differences between the US and Iran are too great to reach an agreement. If neither side is willing to compromise, a lasting peace agreement will be out of reach, and sporadic escalation and prolonged war will become the most likely scenarios."

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