Wave of Japanese bond sell-offs spreads globally, hedge funds short the yen: asset management giants worry "no one dares to take the plunge"

Japanese long-term government bonds have recently experienced a fierce sell-off, with the 40-year yield breaking through 4% for the first time in thirty years, reaching a high not seen in three decades, putting fiscal pressure on both Japan and the US bond markets and increasing volatility. As hedge funds ramp up shorting the yen and large asset management firms worry that the market is “lacking buyers,” this Japanese bond storm is being viewed as an important stress test for the global financial markets.

Japanese long-term government bonds are being sold off, with the 40-year yield surpassing 4%

The Japanese bond market has recently seen intense fluctuations, with the 30-year and 40-year yields jumping over 25 basis points within just a few days, with the 40-year yield breaking through 4%. Since Prime Minister Sanae Takaichi took office in October, the yields on 20-year and 40-year bonds have risen about 80 basis points. This is the first time in over thirty years that Japanese sovereign bonds of these maturities have reached such levels.

Bloomberg pointed out that weak demand at the 20-year bond auction highlights growing investor concerns about Japan’s future issuance scale and inflation risks.

Policy as the fuse: expansionary fiscal spending shakes investor confidence

The immediate trigger for this sell-off was Prime Minister Sanae Takaichi’s announcement of an early general election, along with remarks about lowering the food consumption tax and expanding stimulus spending. The market generally questions whether these policies lack clear funding sources, raising fears that debt issuance may need to be expanded to fill the fiscal gap.

As one of the most heavily indebted developed countries, investors have become pessimistic about Japan’s fiscal discipline, and the bond market has responded to this risk first, serving as an early warning indicator of market confidence.

(Takaichi dissolves the House of Representatives, making bold campaign promises—it’s not just about school lunches)

Yen takes the brunt: hedge funds increase bets on depreciation

The turmoil in the bond market is also reflected in the currency market. Bloomberg data shows that hedge funds have recently significantly increased their short positions on the yen, with net shorts last week experiencing the largest weekly increase since May 2015, reaching -100,000 contracts, climbing to the most pessimistic level since 2024.

Investors expect that if the Japanese government continues its loose fiscal policy after the election, the widening deficit will further weaken the yen’s fundamentals. Currently, the USD/JPY exchange rate is approaching the 160 level, near the lowest point since July 2024, which is also a critical zone where Japanese authorities have previously intervened.

Ripple effects: Japanese bond volatility pressures global bond markets

The impact of Japan’s bond market volatility is spilling over globally. As Japan, a major creditor nation, adjusts its capital allocations, US Treasuries are also under pressure, with the 10-year Treasury yield rising about 6 basis points to 4.28% on Tuesday. US Treasury Secretary Scott Bessent explained, “The weakening of US bond prices is closely related to the ‘spillover effect’ from Japanese bonds.”

(Davos Forum | Greenland and Taiwan both mentioned; US Treasury Secretary discusses key geopolitical battlegrounds)

Mohammed Apabhai, Head of Asia Trading Strategy at Citibank, warned that the rapid increase in Japanese bond volatility could force risk funds to reduce their current exposure by about one-third:

“This could amplify selling pressure in US and Korean bond markets, potentially triggering up to $130 billion in bond sell-offs in the US alone.”

(Is Bitcoin’s script coming true? Japanese bond yields soar, possibly triggering capital outflows and a retreat in arbitrage trading in the US)

Pioneers, Fidelity, and Nomura Securities warn: No one dares to take the risk

Reuters pointed out that several asset management firms also expressed concerns about liquidity in the bond market today.

Vanguard, Fidelity International, and Nomura Securities’ investment managers, fund managers, and macro strategists all believe that, with inflation still above target, central banks acting slowly, and fiscal outlook uncertain, investors find it difficult to determine a reasonable buy zone for Japanese long-term government bonds:

“No one wants to buy or catch this falling knife right now. There are simply no buyers at these prices.”

Although some ultra-long bonds are still held to maturity by insurance companies, the market generally believes that the current lack of marginal buyers willing to take on new risks is the most worrying aspect of this sell-off.

This article “Global Spread of Japanese Bond Sell-Off, Hedge Funds Short Yen: Asset Management Giants Worry ‘No One Dares to Take the Risk’” first appeared on Chain News ABMedia.