Volatility in Japan¡¯s longer-dated government bonds is on the rise following Sanae Takaichi¡¯s election win, and the moves may spill over to markets as far away as the United States and the United Kingdom, according to Goldman Sachs Group.
The ascent of Takaichi as the ruling Liberal Democratic Party (LDP)¡¯s president risks pushing up long-end Japanese yields, strategists including Bill Zu wrote in a note. For every 10 basis point ¡°idiosyncratic JGB (Japanese government bond) shock,¡± investors can expect around two to three basis points of upward pressure on U.S., German and U.K. yields, the strategists wrote.
Moves in JGBs have foreshadowed that of their global counterparts this year, with a spike in superlong yields in the Asian nation amplifying ructions fueled by fears of widening fiscal deficits. Goldman¡¯s warning sharpens the focus on longer-dated notes, which have come under scrutiny as governments ramp up borrowings and inflation proves stickier than expected.
¡°Japan has been a net exporter of bearish shocks onto global long-end rates this year,¡± Goldman¡¯s strategists wrote in a Sunday note. ¡°We expect the news of Ms. Takaichi¡¯s election as LDP President to result in higher long-end JGB yields and a steeper curve.¡±
Yields on Japan¡¯s 40-year debt soared 14 basis points on Monday as traders wagered that Takaichi¡¯s pro-stimulus stance may prompt authorities to sell more government bonds to finance tax cuts for households and stimulate the economy. Benchmark yields on U.S. and New Zealand sovereign notes rose two to three basis points, while Canadian and German bond futures declined.
Whether a renewed long-end selloff has staying power depends on how the political landscape evolves, Goldman¡¯s strategists wrote in the note.
Takaichi, who is poised to become Japan¡¯s first female prime minister, was a surprise winner for many investors positioning for political scion Shinjiro Koizumi to secure the leadership. Bond investors had been wary of fiscal spending even before Takaichi¡¯s win, with opposition parties calling for tax cuts.
A 30-year bond sale scheduled for Tuesday may shed further light on investors¡¯ appetite for the nation¡¯s bonds.
¡°The long-end of the JGB curve has been decoupled from its usual cyclical drivers for some time, and increased uncertainty will likely keep long-end risk premia higher for now,¡± Goldman¡¯s strategists wrote.
With your current subscription plan you can comment on stories. However, before writing your first comment, please create a display name in the Profile section of your subscriber account page.