Japanese government bond yields soared as the market focused on fiscal commitments and election uncertainties

Japan will hold a Senate election this weekend, and the unstable election situation of the ruling coalition has drawn high attention from the market. Sumitomo Mitsui Banking Corporation (SMBC) has warned that if the political situation changes, the Japanese bond market may repeat the turmoil of the "Liz Truss Moment" in the UK.

Bloomberg reported that data shows that the yield on Japanese government bonds with maturities of 20 years or more has risen by at least 20 basis points this month. This trend reflects the widespread selling sentiment in the global bond market, with the root cause lying in investors' collective anxiety over the fiscal sustainability of various countries.

It is reported that the ruling Liberal Democratic Party (LDP) coalition in Japan may face defeat in this election. During the election campaign, major political parties have successively rolled out fiscal commitments with populist tendencies, including providing cash subsidies, lowering consumption taxes and expanding education spending. Analysts are concerned that if these measures are implemented, they may undermine market confidence in fiscal discipline, thereby triggering a fierce reaction from the "bond guardians".

In a report released on Tuesday (July 15), Ataru Okumura, a senior interest rate strategist at SMBC, pointed out: "The problem is that bond guardian uprisings like the Truss shock cannot be completely ruled out; More importantly, the market cannot fully price this risk in advance.

Morgan Stanley MUFG Securities also holds a similar view. Its macro strategist Koichi Sugisaki said that if the ruling coalition loses the election and expectations of a reduction in the consumption tax rise, it may prompt overseas investors to sell off Japan's ultra-long-term government bonds on a large scale.

Japan's benchmark 10-year government bond yield hit a new high since 2008 on Tuesday, while the yields on 20-year and 30-year bonds rose to their highest levels since 1999.