New York/Tokyo — Long-term U.S. and Japanese government bonds have faced significant declines in recent months, driven by poor auction demand, unfavorable fiscal policies, and shifting global monetary conditions. Analysts attribute the downturn to a combination of domestic fiscal strains and broader market uncertainties.
Japan’s Bond Market: Steepening Yields, Weak Demand
Since April, yields on long-term Japanese government bonds (JGBs) have surged as the yield curve steepened. Demand from institutional buyers, particularly insurance funds, has remained sluggish for three consecutive months. Meanwhile, foreign investors have absorbed most ultra-long-term bond supply, exacerbating volatility.
A 20-year bid-to-cover ratio hit historic lows, reflecting dwindling investor appetite. The Bank of Japan’s (BOJ) dovish pivot following the April 2 tariff incident further disrupted markets, prompting unwinding of curve-flattening trades.
Fiscal risks loom as Japan’s ruling and opposition parties push for tax cuts and stimulus ahead of July’s Senate election—despite already strained public finances. Concerns over a potential sovereign rating downgrade, mirroring the U.S.’s recent credit warning, have added pressure.
Global Spillover: UK Inflation, Dutch Pension Reforms
The sell-off aligns with turbulence in other developed bond markets. In the UK, stronger-than-expected inflation data dampened rate-cut expectations, lifting long-term gilt yields. Meanwhile, pension reforms in the Netherlands accelerated curve steepening, echoing trends in Japan.
U.S. Treasuries: Poor Auction, 30-Year Yields Near 2023 Highs
The U.S. 20-year Treasury auction saw tepid demand, while the 30-year yield breached 5%, nearing its Q4 2023 peak. Foreign buyers retreated amid dollar depreciation losses, compounding pressure.
Underlying Drivers: Fiscal Deficits and Policy Gridlock
The slump reflects persistent fiscal challenges across major economies:
• Japan: Debate over consumption tax cuts amid rising deficits.
• U.S.: Fiscal uncertainty tied to Trump-era tax cuts (TCJA), debt ceiling clashes, and credit downgrades.
• Europe: Military spending hikes and pension reforms.
Monetary policy offers little relief, as sticky inflation delays rate cuts. “Buyer strikes” persist—foreign investors offload U.S. Treasuries, while Japanese domestic sellers offset foreign demand fueled by yen appreciation.
Outlook: Caution Advised
With no near-term catalysts to reverse the trend, analysts recommend staying sidelined in long-dated bonds. The narrative remains unchanged: fiscal overhangs and recalibrating rate expectations continue to weigh on developed-market debt.
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