Japanese and French bonds plunge as a "political black swan" catches the market off guard.

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Unexpected political turmoil is shaking global financial markets from Tokyo and Paris, intensifying concerns over fiscal stability in major economies and triggering a fierce sell-off of Japanese and French government bonds.

In Japan, Sanae Takaichi, a supporter of fiscal stimulus policies, won the ruling party’s leadership election, essentially securing her position as the next prime minister. This unforeseen result sent yields on Japan’s 10-year government bonds soaring to their highest point since 2008. Markets are preparing for the prospect of a more dovish Bank of Japan and further expansion of government spending.

Meanwhile, in France, Prime Minister Sebastien Lecornu abruptly resigned less than a month after taking office, further deepening the country’s political crisis. This move triggered a sharp rise in French government bond yields, widened the spread between French and German bond yields, and suddenly intensified market doubts over France’s ability to control the eurozone’s largest fiscal deficit.

These unexpected events are catalyzing what is known as a “currency depreciation trade.” Confronted with mounting debt in developed economies, investors are fleeing major currencies such as the yen and euro, shifting instead into gold, silver, and bitcoin, which are viewed as safer assets.

Unexpected Turn in Japanese Politics Puts Heavy Pressure on Bonds

The turmoil in Japanese markets stems from a surprising political transition. Previously, investors widely expected the more fiscally cautious Shinjiro Koizumi to win the LDP leadership election, and the market had largely priced in further monetary policy normalization from the Bank of Japan.

However, Sanae Takaichi ultimately prevailed in the contest. During last year’s campaign, she described rate hikes as “foolish,” and her pronounced pro-spending stance has been interpreted by the market as a sign of more government expenditure, potentially exacerbating inflation.

This result prompted investors to rapidly adjust their positions, the yen fell 1.8% against the dollar and hit a historic low against the euro. Long-term bonds were sold off, with the 10-year government bond yield reaching its highest level in over a decade.

However, risk assets reacted positively. Japanese stocks soared to a record high. Dilin Wu, a strategist at Pepperstone Group, said:

“Sanae Takaichi’s election as leader of Japan’s ruling party has been interpreted by the market as a clear positive for risk assets.”

Another Prime Minister Resigns, France's Political Crisis Deepens

In Europe, France’s political turmoil also took investors by surprise. Prime Minister Lecornu resigned less than a month after taking office, highlighting the enormous resistance the government faces as it attempts to push through unpopular fiscal tightening measures.

Lecornu has become France's fifth prime minister in two years. His predecessors all stepped down after failing to pass tax hikes and spending cuts intended to reduce the deficit through a fractured parliament.

Despite the frequent changes in France’s leadership, the suddenness of this resignation and the intensity of the market’s reaction indicated that investors were still caught off guard. Following the news, the CAC 40 index slumped and 10-year French bond yields rose by 9 basis points to 3.6%.

The yield spread between French and German government bonds, a key gauge of fiscal risk, has widened to 89 basis points. Chris Beauchamp, Chief Market Analyst at IG Group, wrote:

“To lose one prime minister may be regarded as a misfortune, but to lose four looks like a serious crisis.”

Greater political uncertainty in the future may widen the spread further. Currently, French President Macron faces three options: appointing a new prime minister, calling an early parliamentary election, or resigning himself.

“Currency Depreciation Trade” Heats Up, Safe-Haven Assets in Favor

The political shocks in Japan and France are bringing deep-seated investor concerns about global fiscal health to the forefront. The growing debt burdens in the US, Japan, and Europe are fueling a “currency depreciation trade.”

Under this trend, investors have been pulling out of sovereign currencies and turning to alternative assets they believe are better stores of value.

On Monday, the yen plunged due to political shifts at home, the euro also came under pressure from France’s political crisis, and the dollar faced stress from the ongoing US government shutdown. According to Bloomberg, so far this year, the dollar has depreciated by about 30% against bitcoin.

At the same time, alternative assets like precious metals and cryptocurrencies are hitting fresh highs. Gold prices reached new records on Monday, silver prices neared historical highs, and bitcoin hovered near its record set over the weekend. Chris Weston, head of research at Pepperstone Group, said:

“This has become a massive momentum trade. Nothing creates sentiment like a market that continually goes up — you have to be in it.”

Risk Disclaimer and NoticeThe market has risks. Investment requires caution. This article does not constitute personal investment advice and does not take into account any individual user's special investment objectives, financial circumstances, or needs. Users should consider whether any opinions, views, or conclusions herein are in line with their specific situations. Investing based on this is at your own risk. ```