A violent JGB sell-off driven by election-linked fiscal fears jolted global rates before a tentative Wednesday rebound eased worst-case worries.
Summary:
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Japan’s long-end yields surged Tuesday as snap-election fiscal plans spooked markets.
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The 40-year yield broke above 4%, tightening global financial conditions via spillovers.
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S&P warned tax cuts risk a lasting hit to revenues and fiscal strength.
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JGBs steadied early Wednesday after official calls for calm; Treasuries also stabilised.
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Tariff/Greenland headlines and gold’s surge reinforced the risk-off tone.
A sharp sell-off in long-dated Japanese government bonds (JGBs) on Tuesday spilled into global markets, pushing up overseas yields and weighing on risk sentiment as investors reassessed Japan’s fiscal trajectory ahead of a snap election. Japan’s 40-year yield jumped to fresh record highs, rising above 4% for the first time and reaching around 4.2%, after Prime Minister Sanae Takaichi called a February 8 election and floated a two-year suspension of the 8% food sales tax as part of a broader fiscal push.
The move triggered renewed concern over Japan’s already-stretched public finances and raised tail risks around a potential unwind of “carry trade” positions that have relied on low Japanese yields to fund purchases of higher-yielding global assets. As volatility surged, US long-end yields also rose, underscoring how Japan’s bond market can transmit stress through global capital flows.
S&P Global Ratings added to the fiscal focus, warning that tax cuts, including reductions to consumption tax items such as food, risk becoming a sustained drag on revenues rather than a one-off hit, potentially undermining Japan’s fiscal position over the long run.
By early Wednesday in Asia, JGBs stabilised and rebounded at the open, easing immediate fears of a disorderly “meltdown.” Japan’s 40-year yield fell around six basis points after Finance Minister Satsuki Katayama urged calm, while Treasuries also edged higher in price (lower yields) as the market retraced part of Tuesday’s move. Asian equities opened lower after Wall Street’s sharpest fall since October, while gold extended gains to fresh records amid the volatility.
The backdrop remains complicated by geopolitics and trade risk. President Donald Trump’s renewed tariff threats toward major European economies, tied to the Greenland dispute, have added another layer of uncertainty for risk assets and cross-border flows. Adding to the narrative around confidence and sovereign risk, Denmark’s AkademikerPension said it plans to divest US Treasuries by the end of January, citing concerns about US fiscal sustainability.
With Japan’s election pitch now central to the rates story, markets will watch whether JGB volatility fades — or resurfaces — and how much follow-through emerges on fiscal plans that investors fear could worsen the debt outlook.
This article was written by Eamonn Sheridan at investinglive.com.