The global long-term bond sell-off spreads, with Japan's 30-year government bond yield hitting a record high.

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Amid a global wave of government bond sell-offs, the Japanese market is facing dual pressures both domestically and internationally.

On Wednesday, Japan's 30-year government bond yield briefly rose to 3.28%, the highest level on record. Meanwhile, the 20-year government bond yield also touched 2.69%, a new high since 1999.

This sharp volatility in Japan's bond market comes as concerns about the scale of government debt are mounting globally. The previous day, the UK’s 30-year government bond yield had risen to its highest since 1998, while France's 10-year bond yield also climbed due to worries about government stability. The US 30-year government bond yield returned to near 5%, reflecting widespread investor pessimism towards long-term debt.

In addition to external pressures, domestic political uncertainty in Japan has also become a catalyst for selling. The market is increasingly concerned that Prime Minister Shigeru Ishiba could be forced to step down after his Liberal Democratic Party’s election defeat. This potential change may lead to a relaxation of fiscal discipline, further unsettling investors. As a result, the yen fell to its lowest level against the US dollar in about a month on Tuesday. At press time, USD/JPY rose 0.13% to 148.52 yen. The next key focus for the market will be Thursday's 30-year Japanese government bond auction.

The Eye of the Global Bond Market Storm

The decline in Japan’s long-dated bonds is not an isolated event but rather a reflection of global debt market turmoil. From the US to Europe, ongoing worries about increased government spending and persistent inflation are driving long-term yields higher across the board.

On Tuesday, issuers around the world sold at least $90 billion in investment-grade corporate debt in a single day, making it one of the busiest weeks of the year. This flood of corporate bond issuance has diverted funds that might otherwise flow into the sovereign bond market, adding further pressure on demand for government bonds.

Takashi Fujiwara, Chief Fund Manager at Resona Asset Management, said:

“Global fiscal concerns are fueling the sell-off in ultra-long-term bonds, leading to tremendous steepening pressure on the yield curve.”

Ruling Party Infighting Adds to Woes

Domestically in Japan, turmoil within the ruling Liberal Democratic Party is introducing new variables to the market. On Tuesday, the party released an assessment report on the July upper house election defeat. Although it did not directly name Shigeru Ishiba, several senior members have resigned, paving the way for a leadership reshuffle.

Tobias Harris, political analyst at Foresight Japan, pointed out that this report increases the likelihood of the LDP removing Ishiba from office. Tokyo traders said there are concerns that a new prime minister replacing Ishiba may pursue a more populist agenda, including increased government spending and pressuring the Bank of Japan to halt interest rate hikes.

Stephen Spratt, Asia-Pacific rates strategist at Societe Generale, analyzed that the market is weighing two possibilities: either Ishiba introduces generous spending plans to win back party support, or a new leader comes in and implements expansionary fiscal policy. He concluded:

“Either way, the market expects a more accommodative fiscal stance, and right now the market does not want to see more government spending.”

Key Auction Approaching, Investor Confidence Under Pressure

The next key focus for the market will be Thursday's 30-year Japanese government bond auction. This auction is seen as a critical test of investor confidence. Global markets are closely watching its outcome to gauge whether the turmoil will spread from Tokyo to other markets.

Although demand for Tuesday's 10-year bond auction was solid, offering some comfort, recent investor demand for several Japanese debt offerings has been weak or unpredictable. Since May, institutional investors—including Japanese life insurers—have shifted towards investing in shorter-term sovereign debt, leading to persistently lukewarm interest in long-term government bonds.

The cautious sentiment among investors is apparent. Rajeev De Mello, global macro portfolio manager at Gama Asset Management, is “very cautious” about Thursday’s 30-year bond auction. He said:

“As a bond investor, I am reducing duration in Japanese debt and avoiding long bonds in all markets globally.”

Strategist Mark Cranfield also warned that amid heightened global debt concerns, this auction will be “a very tough sale.” He noted that as 30-year Japanese government bond yields break through the 3.0% and 3.25% levels, fixed-income investors will look to 3.5% as the next relative value level, describing this as “a sell-off with almost no clear speed bumps ahead.”

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