Long-dated Japanese government bond (JGB) yields shot to record highs on Tuesday on concern that tax cuts touted across the political spectrum ahead of a February election will test already strained government finances.
Demand fell at a 20-year debt auction and that seemed to open the floodgates and send yields into uncharted territory, with buyers scarce.
Benchmark 10-year yields are up 16 basis points in two sessions and 25 bps since talk of an election in Japan swirled earlier in the month.
Thirty-year yields are up 38 bps in two days. Bond yields move inversely to prices. Here are what market participants are saying about the selloff:
MASAHIKO LOO, SENIOR FIXED INCOME STRATEGIST, STATE STREET INVESTMENT MANAGEMENT, TOKYO: "The (Japanese Prime Minister Sanae) Takaichi trade is still very much alive. The easiest trade you can do is to go short on yen, short JGBs or go a steepener on yields, and then you go long on Nikkei."
"There's a very big herd mentality in Japan. That's why all the banks are not buying. And why are they not buying? Because they are waiting for BOJ to hike." "No one wants to catch a falling knife. When there's falling knives, you have short-term volatility."
"Investors are likely holding back on jumping into the market in the run-up to Friday's BOJ meeting. Much rides on the Bank of Japan Governor's (Kazuo Ueda's) press conference on Friday, with a hawkish tilt in his outlook likely doing much to anchor investor expectations and calming financial market volatility, while any signs of a dovish trajectory would risk amplifying market moves."
"Though Japan's budget balance position is much better at the moment than that of many of its developed market peers, high-debt constraints the government's ability of pursuing aggressive fiscal easing.
"Even if the BOJ strikes a hawkish note on Friday, therefore, financial market volatility might persist through the election and until greater clarity emerges on the fiscal plans of the new government."
"It's all fear of Takaichi's reflationary policy and particularly on the consumption tax cuts, because she was ambiguous about timing and how she finances it. "That exacerbates the fear and prolongs it ... it's a shock-like event and (can continue) unless Takaichi starts to be more realistic and calm down the market ... into the election, that's rather unlikely.
"The bottom line is no one wants to buy or catch the falling knife at this point. There's no buyers on the level of the market."
SHUICHI OSAKI, SENIOR PORTFOLIO MANAGER OF THE FIXED-INCOME DEPARTMENT, MEIJI YASUDA ASSET MANAGEMENT, TOKYO: "JGB yields tend to be sold off during the election campaign periods. There is a risk of a sell-off of foreigners in the future as they have become main players in super-long JGBs. There are concerns that who would be buying them when foreign investors are to sell them."
