US Treasury action buys time for JGBs, but 3% yield barrier nears
US Treasury buybacks offer temporary relief to JGBs, but analysts see 3% yield breach as inevitable.
The US Treasury's recent intervention to curb the surge in long-term interest rates has provided a temporary reprieve for Japanese government bonds (JGBs). However, market analysts caution that this relief is likely to be short-lived, with the closely watched 3% yield threshold appearing increasingly likely to be crossed.
The 10-year JGB yield reached 2.945% on Tuesday, its highest level in three decades. This move reflects the broader strain on global debt markets as investors contend with persistent inflation and growing worries about government debt levels.
The Treasury's actions, which included announcing increased buybacks and assurances of liquidity support from Treasury Secretary Scott Bessent, helped global bond markets recover temporarily. Yet, the underlying forces pushing Japanese yields upward remain intact.
Nomura Securities' executive rate strategist, Mari Iwashita, points to a weak yen and loose fiscal policy as key drivers. "It would not be surprising if the long-term rate rose to around 3.3%," she stated.
Inflation continues to be a significant headwind for bond markets worldwide, exacerbated by the ongoing Middle East crisis and high oil prices. Even before these geopolitical tensions, JGBs and the yen were under pressure due to concerns that Prime Minister Sanae Takaichi's stimulus policies could further strain Japan's fiscal position.
The Treasury's intervention has sparked speculation that Tokyo might adopt similar measures to support the JGB market. However, with US yields already drifting higher again, NLI Research Institute's Yuki Fukumoto believes Bessent's buyback strategy "will not be a fundamental solution" to the trend of rising long-term rates.
Short-term JGBs are also feeling the heat, with yields near multi-decade highs on growing expectations of Bank of Japan tightening to protect the yen and control inflation. "The phase of rising interest rates is not over," said Keisuke Tsuruta, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.