Globally, ultra-long bonds have come under renewed pressure as fiscal worries resurface across major developed markets, with a shift away from longer maturities by institutional investors such as insurers and pensions. US Treasury yields for the 30-year maturity are close to the 5% mark, even after pulling back on Wednesday.
Market anxiety has also been fueled by political developments in Japan. A key power broker of Prime Minister Shigeru Ishiba and several senior officials offered to resign this week, casting fresh doubt on the premier’s ability to hold onto power. Local media reported that former prime minister and Liberal Democratic Party member Taro Aso is set to call for an early party election.The surge in super-long yields “naturally increases the cost of servicing debt and puts pressure on the budget, reducing fiscal flexibility,” said Freddy Wong, head of fixed income Asia Pacific at Invesco Ltd. “Coupled with the current political uncertainty, the ability to maintain fiscal discipline and policy continuity is being called into question.”
Ishiba met with Bank of Japan Governor Kazuo Ueda on Wednesday to exchange views on the economy and financial markets, including currencies. The pair’s first meeting since February suggests the premier is trying to show market participants that his government and the BOJ will be coordinating closely, even as concerns grow he may be forced to step down.Adding to the steepening pressure on the bond curve, BOJ Deputy Governor Ryozo Himino struck a cautious tone in a speech Tuesday, saying the central bank must avoid hiking rates either too early or too late — a signal that fell short of the hawkish rhetoric some investors had anticipated.
Traders have pared back expectations for a near-term rate hike, with overnight index swaps now pricing in less than a 40% chance of a move at the October policy meeting, versus more than 50% a week ago.
At Thursday’s auction, traders will be closely watching the bid-to-cover ratio, a key measure of demand. It stood at 3.43 at the last sale of 30-year debt in August, roughly in line with the 12-month average, after the finance ministry announced cuts to issuance of super-long bonds to calm volatility. But that may not be enough now to reassure investors given the current backdrop.
In the coming days, the political situation overhangs the market, with a key LDP meeting on Sept. 8 being closely watched for any decision to bring forward the party’s leadership election. While Ishiba faces pressure from within the party, recent polls show his public approval has improved, and he has not indicated plans to step down.
“The outcome of the vote is important for the rates outlook,” Societe Generale SA strategists, including Stephen Spratt, wrote in a note on Wednesday. A “rise in political risk would reduce the risk of a BOJ hike and keep fiscal concerns at the forefront”, translating into higher long-term yields.
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