- The yield on the benchmark 10-year Japanese government bond rose by 3 basis points to 2.720%, while the 5-year and 20-year yields also increased by 1.5 basis points each, indicating a repricing of sovereign debt markets due to geopolitical tensions in the Middle East causing input inflation risks.
- Although Prime Minister Sanae Takaichi claimed that the additional budget of about 3 trillion yen, financed through deficit bonds, would not increase the net issuance to the market, the potential expectation of fiscal expansion marginally weakened the defensive confidence of bullish funds.
- The U.S. military's airstrike on Iran led to a structural jump in international crude oil prices, and the delay in the Hormuz Strait navigation agreement intensified market concerns that the Bank of Japan might be forced to accelerate the normalization of monetary policy.
Fiscal Expansion Concerns and Issuance Volume Game
The collective rise in Japanese bond yields in the secondary market on Tuesday directly reflects investors' cautious attitude towards the direction of fiscal discipline. Despite Prime Minister Sanae Takaichi's public statement emphasizing that due to the actual surplus in tax revenue from the previous phase, the approximately 3 trillion yen deficit bonds originally planned to be issued before June will no longer be released to the market, thus fully offsetting the deficit financing needs of the additional budget prepared in response to the Middle East situation. However, Okasan Securities bond strategist Yuki Kimura pointed out that market doubts about the expansion of medium- to long-term fiscal spending have not been completely alleviated. Against the backdrop of potential consumption tax adjustments and rigid growth in government social security spending, the potential implicit pressure on the supply side remains a Damocles sword hanging over long-term bonds.
Geopolitical Risk Premium and Input Inflation Pressure
The sharp deterioration of the external environment has become another key catalyst driving today's yield rise. With the U.S. military airstrikes on Iranian targets, the protracted war situation in the Middle East is further escalating, directly leading to increased risk aversion in the global commodity market, and international crude oil prices have risen accordingly. As an economy highly dependent on energy imports, Japan faces very real risks of deteriorating trade conditions and resonant input inflation. The continued high crude oil prices will not only directly increase the production costs of micro-enterprises in Japan but will also push up the core consumer price index through the price transmission mechanism, thereby strengthening the market's conditional probability pricing for the Bank of Japan possibly adopting a more hawkish policy path.
Yield Curve Under Pressure Across All Maturities
From today's micro-performance on the trading floor, the yield curve shows a characteristic of overall upward shift. The mid-term 5-year Japanese bond yield rose by 1.5 basis points to 1.97%, indicating a correction of short-term liquidity premium; while the long-term 20-year Japanese bond yield also rose by 1.5 basis points to 3.620%, reflecting capital's re-anchoring of long-cycle macro variables. Analysts believe that the current bond market volatility is not solely due to tight funding conditions, but rather a valuation alignment process under the interaction of three variables: fiscal bottom line, geopolitical friction, and monetary policy turning point.
Resilience of Demand for Super Long-Term Government Bonds
Despite the overall market pressure, the structural performance of the supply side of super long-term government bonds still provides a certain degree of marginal support to the market. Mitsui Sumitomo Trust Asset Management Senior Strategist Takuji Inatome pointed out that given the results of the 20-year government bond auction that ended last week were significantly better than the market had previously expected, the secondary market generally believes that the yield on super long-term government bonds at the current position already has relative technical allocation value, and the short-term upward space may have peaked temporarily. As the next trading day is about to usher in the concentrated auction of 40-year super long-term government bonds, institutional investors' defensive allocation demand in specific high-yield intervals is expected to remain robust, thereby somewhat mitigating the slope of long-term asset valuation adjustments.
