(Bloomberg) -- Japan’s once-slumbering bond market has roared back to life with a burst of volatility that is echoing around the world.
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Major debt markets have moved in tandem with Japanese government bonds during the recent rout, with a spike in super-long yields in the Asian nation amplifying ructions fueled by global fears of widening fiscal deficits.
The risk of more spillover is on the horizon. An analysis by Bloomberg shows that Treasuries have become more sensitive to moves in Tokyo, just as fluctuations in Japan’s $7.8 trillion debt market soar to the highest level in over two decades.
This is in stark contrast to just a few years ago, when the Bank of Japan’s yield-curve control regime acted as a kind of global anchor on borrowing costs. With that now gone, the broader fixed-income market is finding itself unmoored.
The turmoil has already handed investors in global bonds the first monthly loss for the year as US tariffs and rising government borrowings dented sentiment. In Japan’s case, weakening investor appetite points to even higher yields, increasing a government debt load that is the worst among major economies.
“The rise in Japan bond yields has meaningful spillover impacts globally,” said Freddy Wong, head of Asia Pacific fixed income at Invesco Ltd. which oversees $1.94 trillion. “As JGB yields rise, the relative attractiveness for sovereign bonds in other parts of the world decreases, which drives selloffs and increases volatility in other sovereign debt markets.”
The US debt market has long been exposed to risks from Tokyo, given that Japanese investors are the largest foreign holders of US bonds. But a key turning point came in 2022, when the BOJ started to loosen its grip on bond yields. Treasuries have become steadily more susceptible to changes in JGBs since then, according to Bloomberg’s analysis of 10- to 30-year spreads in both markets.
This change, and the recent spike in volatility in Japan, are reshaping the dynamics of the global day for bond trading. Under yield-curve control that started in 2016, Japan’s market was a world unto itself, with benchmark 10-year securities sometimes going untraded for days. Not anymore. When the market opens in Tokyo at around 9 a.m. local time, investors across Asia and beyond tune in for moves that may flow through to Frankfurt, London and New York.
