Japan's Rising 30-Year Bond Yields Signal Trouble for Risk Investments

Key Points:

The yield on Japan’s 30-year government bond has increased by over 30 basis points in three days, exceeding 3%.
Upcoming elections and fiscal policy concerns are influencing this rise in yields.
Increasing yields might lead to volatility in U.S. Treasury notes, potentially impacting risk assets like Bitcoin.

The yield on Japan’s long-term government bonds has sharply escalated since last Friday, signaling potential instability in bond markets worldwide. This trend often results in tighter financial conditions, nudging investors away from riskier assets. The latest data revealed that the 30-year JGB yield surpassed 3% for the first significant time since May 23, when it reached a peak of 3.20%. Comparatively, the 40-year yield increased nearly 15 basis points to 3.36%.

Japan

This increase is likely a reflection of worries about Japan’s financial policies ahead of the Upper House elections this month, where Prime Minister Shigeru Ishiba defended his initiative for cash handouts against calls from the opposition for tax reductions. Additionally, former President Donald Trump’s imposition of a 25% tariff on Japan is adding stress to the market.

Vigilance Required for Rate Fluctuations

The rise in Japanese ultra-long bond yields may also prompt shifts in yields in the U.S. and beyond, as governments engage in excessive spending. Heightened volatility is anticipated, which can lead to stricter financial conditions, affecting risk assets including Bitcoin. Market participants should monitor the MOVE index, which gauges the 30-day implied volatility in U.S. Treasury notes.

Attention to Upcoming Bond Auction

Anticipation is building for the Japanese Ministry of Finance’s forthcoming auction of 20-year bonds this Thursday; historically, this auction has yielded disappointing results that could heighten volatility in longer-term bond yields.

Japan’s Low Rate Era Ends

Japan had long maintained ultra-low bond yields through unconventional monetary policies, which in turn suppressed yields globally. However, since 2023, Japan has gradually moved towards normalizing its monetary policy, leading to a rise in yields worldwide.