Japanese government bonds face "Truss moment": long-term yields soar by 25 basis points, market plunges into its most chaotic day in years

January 20 saw a sudden, violent sell-off in the Japanese bond market, which traders described as "the most chaotic trading day in recent years." The sell-off, which began slowly, quickly escalated into a full-blown shock, pushing some long-term bond yields to historic highs. At the core of market panic lies Japanese Prime Minister Sanae Takaichi’s tax cut and spending increase plan, which has triggered deep concerns among investors about Japan’s fiscal sustainability. Japan is one of the most heavily indebted governments in the world. According to Xinhua News Agency, Prime Minister Sanae Takaichi said at a press conference on the 19th that the House of Representatives would be dissolved on January 23 and she would seek the electorate's mandate to continue governing, with elections to be held on February 8. The current term of Japan’s House of Representatives was originally scheduled to expire in October 2028. At the press conference, Takaichi remarked: > “We will end overly tight fiscal policies... We must break free from excessive austerity and invest boldly in risk management.” Masahiko Loo, Senior Fixed Income Strategist at State Street Investment Management, noted: > **“The market is pricing in a 'Truss moment' for Japan.”** The term "Truss moment" originates from former UK Prime Minister Liz Truss, who triggered a massive sell-off in the UK bond market in 2022 by announcing tax cuts without funding sources, leading to her quick ouster. **Japan’s 30-year and 40-year government bond yields surged more than 25 basis points in a single day**, marking the biggest one-day move since Trump's tariffs roiled global markets last year. Meanwhile, the weak result of the 20-year bond auction heightened concerns about Takaichi’s fiscal policies, feeding a vicious cycle of “sell-off – increased worry – further sell-off.”

This turmoil quickly spilled over into global bond markets. US Treasury yields climbed to their highest level in over four months, with 30-year yields at one point rising by 10 basis points to 4.94%, and 10-year yields up 7 basis points to 4.30%.

## Calm Trading Day Suddenly Turns to Market Crash The 20-year bond auction on January 20 saw a lukewarm response. Although not a direct trigger for the plunge, it was already an ominous sign. Kunibe Shinji, Chief Portfolio Manager in Global Fixed Income at Sumitomo Mitsui DS Asset Management Co., recalled: > “When what seemed like a routine 20-year bond auction suddenly turned into a market crash, everyone was glued to their screens.” The sell-off quickly set off a chain reaction, forcing some hedge funds to urgently close out losing positions. A fixed income manager revealed hedge funds suffered losses in “flattening trades” — a strategy that profits when the yield gap between long-term and short-term bonds narrows, but on this day the gap widened sharply due to surging long-term rates. Japan’s credit market also came under visible strain. **Average yields on high-grade corporate bonds jumped further on Tuesday, after hitting record highs the previous day.** This level has reached a “threshold” warned about by several executives, meaning borrowers long reliant on low-cost financing will feel significant pressure. Market volatility even led at least one credit trader to pull out of a multi-million dollar dollar-denominated deal involving a subsidiary of a major Japanese manufacturer. ## Some Investors Seek Opportunities Amid Panic Not all investors were caught up in the turmoil. Gerald Gan, Chief Investment Officer of Reed Capital Partners, said that after witnessing the extreme price movements, he started buying Japanese government bonds in the afternoon trading session: > “Trading was insane, with yields moving 27 basis points in a single day. The market was severely out of balance; I even had to trim some US Treasuries to add Japanese bonds.” Vincent Chung, Portfolio Manager at T. Rowe Price, also replenished some underweight positions during the sell-off. He explained: > “When the market is as chaotic as today, investors often choose to buy back moderately because we can’t pinpoint the top.” Meanwhile, global bond investors’ bearish sentiment toward Japanese government bonds continued to intensify, **renewing attention to the long-standing 'widowmaker' trade — shorting Japanese bonds to profit from yield spikes.** ## Fiscal Concerns Intensify Pressure on Life Insurers The sell-off has further increased pressure on Japanese life insurers, which hold large amounts of government bonds. An investment manager at a major life insurer admitted that worries about future fiscal stability will make it hard for these institutions to re-enter the market for Japanese government bonds, even as yields become more attractive. Takaichi’s plan to suspend the sales tax on food and beverages is widely seen as an effort to gain support for next month's snap election. The measure is expected to cost about 5 trillion yen ($31.6 billion) a year. Takaichi stated the tax shortfall would not be filled by issuing more government bonds, but investors are skeptical of this promise. Some analysts believe the two-year suspension is likely to become permanent, since politically it would be nearly impossible to raise taxes before the next election in 2028. ## Sell-Off Spreads to Global Bond Markets US Treasuries resumed trading after the Monday holiday, and investors reacted to Tuesday’s plunge in Japanese bonds as well as escalating tensions between Europe and the US over control of Greenland. Long-term bonds led the drop, with 30-year US Treasury yields rising by 10 basis points to 4.94%, and 10-year yields increasing by 7 basis points to 4.30%—both the highest since September 3 last year. Concerns about Japan’s fiscal outlook continued to ferment during the Asian trading session, pushing the country’s 40-year bond yields over 4%, a record high. This pressure quickly transmitted to global long-term bond markets, with 30-year bonds in Europe also showing weakness. Ronald Temple, Chief Market Strategist at Lazard Asset Management, noted: > “Japanese government bond yields have risen to a level where, after currency hedging, they are no longer attractive relative to US Treasuries. If Japanese yields continue to climb, a rational allocation for Japanese investors may be to repatriate funds back home.” Andrew Ticehurst, Senior Rates Strategist at Nomura Australia Ltd., added: > “The key new development here is that the US itself has become a source of uncertainty, rather than the traditional safe haven.” Risk Warning and Disclaimer Markets are risky, and investments should be made with caution. This article does not constitute personal investment advice, nor does it take into account individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article fit their particular circumstances. Investments made on this basis are at your own risk.