Key Points
- Japan may reduce the issuance of super-long bonds, which could help calm global markets. Bond yields dropped in Japan, the U.S., and other major economies.
- Investor appetite for long-term bonds remains weak despite the proposal.
- Other nations, such as the U.K. and the U.S., are also shifting toward short-term debt.
- Japan’s massive debt burden and reduced central bank support add complexity.
Japan, one of the world’s most indebted developed economies, has triggered a wave of calm in global bond markets after reports emerged that its Ministry of Finance may reduce its issuance of long-term debt. The news, reported by Reuters on Tuesday, helped reverse a recent bond selloff across markets from Japan and South Korea to the U.S. and the U.K., sending bond prices up and yields down.
The proposal to reduce the issuance of super-long tenor Japanese Government Bonds (JGBs) came as yields on 40-year JGBs reached a record high of 3.675% last week. Since then, yields have fallen by 40 basis points. Similarly, 30-year U.S. Treasury yields dipped below the critical 5% mark, offering relief to a steepening yield curve.
Michael Lorizio of Manulife Investment Management said Japan’s move is a potential model for other countries facing fiscal stress, calling it a “test case” for how governments can respond flexibly to bond market pressures. However, investor demand for long-term JGBs remains shaky—Wednesday’s 40-year bond auction drew the weakest response since July, following a disastrous 20-year auction a week earlier.
Analysts caution that this is a temporary fix. Tom Nakamura of AGF Investments noted that while the market appears more stable, the underlying structural issues remain. He has shifted his portfolio away from long-term bonds toward countries such as Germany, Poland, and Romania, which exhibit stronger fiscal health.
The trend isn’t unique to Japan. Britain is also reducing its reliance on long-term debt amid rising borrowing costs. Meanwhile, the U.S. faces ballooning debt, with potential tax cuts under former President Donald Trump projected to add $3.8 trillion over the next decade. Moody’s recently downgraded the U.S. credit outlook, forecasting debt to rise to 134% of GDP.
Globally, investors are demanding higher yields to absorb the rising debt, forcing governments to consider issuing more short-term bonds. The consensus is clear: debt sustainability is becoming a central market concern.
