Japan’s Long Bonds Rally as Takaichi Win Eases Fiscal Concerns

Thierry Wizman, Global FX & Rates Strategist at Macquarie Group, discusses 'Sanaenomics' and Japan's productivity focused agenda.

Japan’s government bonds gained after Prime Minister Sanae Takaichi’s historic election triumph fueled confidence among investors that increased fiscal spending can be digested by the market.

Yields declined across the curve, with the biggest drop seen in that of the volatile 40-year tenor, which fell 9 basis points to 3.725%. Yields have now retreated to near levels seen in early January when Takaichi’s snap vote was first reported. That triggered a rout in Japanese debt that threatened to destabilize global bond markets.

The reaction suggested that some fund managers are ready to give Takaichi the benefit of the doubt for now, betting that her success will allow for clearer policy and lower the risk of worst-case fiscal scenarios. Speaking Monday in a press briefing, the premier vowed to build trust with financial markets as concerns persist over how she’ll pay for a planned tax cut.

“The bigger-than-expected victory over the weekend means the Takaichi government will be more fiscally sound,” as it reduces fiscal demands from her coalition party, said Russel Matthews, a senior portfolio manager at RBC BlueBay Asset Management.

“We remain positive on the outlook for Japanese government bonds, particularly in the long and ultra-long sectors of the yield curve,” he said. Yields on both 20- and 30-year bonds also fell around 6 basis points, to about 3.105% and 3.495% respectively, with the Japanese market getting support from US Treasuries. Moves were more pronounced for the 40-year sector, which has seen some wild swings over the past month, in part due to its low liquidity.

The drop in yields was less for shorter-tenor notes on speculation the Bank of Japan may raise interest rates again in the months ahead. The swaps market is pricing in a 78% chance of a quarter point increase by the BOJ’s April meeting, and certainty of another hike by June.

The yen, meanwhile, strengthened 0.2% to 155.56 against the dollar. Japanese stocks extended Monday’s rally.

“The market will be watching the PM’s statements and the progress of JGB auctions carefully in the months ahead for any signs of wobbles,” Jane Foley, FX strategist in Rabobank, said in a note Monday.

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