Oil prices, inflation, and geopolitical tensions are jointly unsettling Japan's bond market, stirring up a storm. On May 13, the yield on Japan's 20-year government bonds rose by 5 basis points to 3.498%, surpassing the previous high of 3.46% set on January 20 and reaching its highest level since 1997. The yields on 10-year and 30-year Japanese government bonds also increased by at least 5 basis points, rising to 2.59% and 3.86%, respectively. The core logic driving this movement is not complicated: high oil prices → rising inflationary pressures → bondholders demanding higher returns → rising yields. Behind this lies the simultaneous impact of three negative factors on global bond markets: a sharp increase in the risk of a breakdown in U.S.-Iran ceasefire talks, U.S. CPI data exceeding expectations, and political turmoil in the UK.
Triple Pressures Converge This round of yield increases is not driven by a single factor but by multiple pressures simultaneously accelerating. First, oil prices. The U.S. and Iran have mutually vetoed each other's ceasefire proposals, with no immediate resolution to the Middle East conflict in sight, keeping oil prices elevated. As long as oil prices remain high, Japan's inflationary pressures are unlikely to dissipate—Japan is highly dependent on energy imports, and every increase in oil prices directly translates into higher consumer prices. Second, pressure transmission from U.S. Treasuries. The latest U.S. inflation data exceeded expectations, prompting markets to increase bets on future Federal Reserve rate hikes, driving U.S. Treasury yields higher. There is a correlation between U.S. and Japanese bond yields; when U.S. yields rise, Japanese yields are also affected. Third, the "negative example" set by UK government bonds. Long-term UK bonds have declined due to political risks, and this negative sentiment has spilled over into the Japanese bond market. Bloomberg market strategist Mark Cranfield commented: "The rise in Japanese government bond yields on Wednesday is adding fuel to the already burning fire in G10 bond markets." He also noted that the market faces a "double test" of 30-year bond auctions in the next 24 hours—a U.S. 30-year bond auction later today (following a disappointing 10-year auction result) and a Japanese auction on Thursday. Bond auction results often serve as a barometer of market sentiment; if demand is insufficient, yields could rise further.
Yen Depreciation: 10 Trillion Yen Intervention Fails to Halt Decline Behind the rising yields, the movement of the yen is another critical variable. The yen has continued to weaken against the U.S. dollar recently. Despite multiple rounds of intervention by Japanese authorities, the effects have been limited. According to Bloomberg, citing informed sources, Japanese authorities intervened in the foreign exchange market from April 30 through the Golden Week holiday period. Based on central bank account data analysis, the scale of intervention during this period reached approximately 10 trillion yen (about $633 billion). However, the yen has yet to stop declining. The ongoing tensions in the Middle East and Japan's own fundamental pressures are jointly suppressing the yen. The weaker the yen, the higher the import costs, making inflation harder to control. This exacerbates the situation for Japan's bond market—rising inflation erodes the real returns on bonds, prompting investors to demand higher yields as compensation.
"Uptrend Firmly Established" Market participants believe this round of rising Japanese bond yields is not a short-term fluctuation. Wee Khoon Chong, Senior Market Strategist for Asia-Pacific at BNY Mellon, stated bluntly: "The uptrend in Japanese government bond yields is firmly established, driven by expectations of increased supply pressure due to fiscal deficits, a weak yen, and persistently high commodity prices. These factors are highly likely to continue pushing inflationary pressures higher in the future." It is worth noting that Japan's 20-year government bonds are a relatively illiquid instrument, making their prices more prone to significant fluctuations. In January of this year, Japanese bonds experienced a sharp sell-off—triggered by market concerns over Prime Minister Sanae Takaichi's fiscal policies. This sell-off eventually spilled over into the U.S. Treasury market, drawing high-level attention from U.S. Treasury Secretary Besant, bringing cross-market contagion risks into regulatory focus.
"NACHO Trade": Market Abandons Hopes for Peace Another key point in this bond market turmoil is oil prices. U.S.-Iran ceasefire talks have reached a deep impasse. According to reports, Iranian Parliament Speaker Mohammad Bagher Ghalibaf publicly stated on the 12th that the U.S. "has no choice but to accept the rights of the Iranian people as outlined in the 14-point plan" and added that Iran's armed forces are prepared to respond to any aggression. Former U.S. President Donald Trump responded by calling Iran's plan "a bunch of garbage," stating it fails to address nuclear issues and that the ceasefire agreement is "hanging by a thread." Last Thursday, U.S. and Iranian forces exchanged fire in the Strait of Hormuz, with both sides accusing the other of provocation. Against this backdrop, the front-month WTI crude oil futures contract has returned above $100 per barrel, and spot Brent crude oil is significantly outperforming near-month futures, indicating renewed signs of tightening supply in the physical market. Wall Street has rapidly formed a new trading narrative—"NACHO," an acronym for "Not A Chance Hormuz Opens." eToro market analyst Zavier Wong stated, "NACHO essentially represents the market giving up on expectations for a quick resolution." This shift in expectations is reshaping market positions: the combination logic of going long on crude oil, shorting long-dated U.S. Treasuries, and increasing holdings of inflation-protected assets is gaining broader acceptance. Bloomberg Economics analysts Dina Esfandiary and Becca Wasser stated bluntly, "The differences between the U.S. and Iran are too wide to bridge an agreement. If neither side is willing to make concessions, a lasting peace agreement will remain distant, with sporadic escalations and prolonged conflict being the most likely scenarios."
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