On January 20th, Japan's bond market experienced a severe sell-off, described by traders as "the most chaotic trading session in recent years." The selling wave rapidly escalated from a slow start into a full-blown rout, driving yields on some long-term bonds to record highs.
The core of the market panic points directly to Japanese Prime Minister Sanae Takaichi's tax-cut and spending-increase plan, which has sparked deep investor concerns over Japan's fiscal sustainability. Japan is one of the most heavily indebted governments globally. According to Xinhua News Agency, Prime Minister Sanae Takaichi stated at a press conference on the 19th that she would dissolve the House of Representatives on January 23rd and seek a voter mandate to continue governing, with a general election scheduled for February 8th; the term for the current members of Japan's House of Representatives was originally set to expire in October 2028. Takaichi stated bluntly at the press conference:
"It will end the era of excessive fiscal tightening... We must break free from the constraints of excessive tightening and boldly invest in risk management."
Masahiko Loo, Senior Fixed Income Strategist at State Street Investment Management, noted:
"The market is pricing in a Japanese version of a 'Truss Moment'."
The term "Truss Moment" originates from former UK Prime Minister Liz Truss. In 2022, her proposal of a series of unfunded tax-cut plans triggered a violent sell-off in the UK bond market, ultimately leading to her rapid downfall. Yields on Japan's 30-year and 40-year government bonds surged by more than 25 basis points in a single day, marking the largest daily swing since the Trump tariff shocks roiled global markets last year. Concurrently, a weak 20-year bond auction result intensified worries about Takaichi's fiscal policies, creating a vicious cycle of "selling - increased concern - more selling." The turmoil quickly rippled through global bond markets. US Treasury yields climbed in sync to their highest levels in over four months, with the 30-year yield rising as much as 10 basis points to 4.94% and the 10-year yield advancing 7 basis points to 4.30%. A calm trading day suddenly turned into a market crash. The 20-year government bond auction held on January 20th received a lukewarm response; while not a direct trigger for the plunge, it served as an ominous sign. Kunibe Shinji, Chief Portfolio Manager of the Global Fixed Income Department at Sumitomo Mitsui DS Asset Management Co., recalled:
"When this seemingly routine 20-year bond auction suddenly turned into a market crash, everyone was glued to their screens."
The selling wave quickly triggered a chain reaction, forcing some hedge funds to urgently close out loss-making positions. A fixed-income manager revealed that hedge funds suffered losses on "flattener trades" – positions that typically profit when the yield spread between long-term and short-term bonds narrows, but on that day, the spread widened significantly due to a sharp spike in long-term rates. Japan's credit market also felt significant pressure. The average yield on high-grade corporate bonds jumped further on Tuesday, after having already touched a record high the previous day. This level has reached a "threshold" previously warned about by several corporate executives, indicating that borrowers long reliant on cheap financing would face substantial pressure. The extreme market volatility even caused at least one credit trader to temporarily pull out of a multi-million dollar trade involving US dollar-denominated securities issued by a subsidiary of a major Japanese manufacturer. Some investors sought opportunities amidst the panic. Not all investors were trapped by the violent swings. Gerald Gan, Chief Investment Officer at Reed Capital Partners, stated that after witnessing the extreme moves, he began buying Japanese government bonds during the afternoon session. He said:
"The trading behavior was simply insane. A 27 basis-point intraday swing in yields indicates a severely unbalanced market. I even had to reduce some of my US Treasury holdings to increase my allocation to Japanese bonds."
Vincent Chung, a Portfolio Manager at T. Rowe Price, used the sell-off to cover some of his underweight positions. He explained:
"When the market becomes as disorderly as it did today, investors often choose to cover modestly because we cannot precisely pinpoint the top."
Meanwhile, bearish sentiment towards Japanese government bonds among global fixed-income investors continued to intensify, refocusing attention on the long-dubbed "widow-maker" trade strategy – profiting from rising yields by shorting Japanese government bonds. Fiscal worries intensify pressure on life insurers. The sell-off further increased pressure on Japanese life insurance companies, which hold substantial amounts of government bonds. An investment manager at a major life insurer admitted that concerns over future fiscal stability would make it difficult for these institutions to easily return to the market, even if Japanese bond yields become more attractive. Sanae Takaichi's plan to suspend the sales tax on food and beverages is widely seen as an attempt to gain support for next month's snap election. The measure is estimated to cost about 5 trillion yen (approximately $31.6 billion) annually. Takaichi stated that the tax shortfall would not be filled by issuing more government bonds, but investors remain skeptical of this promise. Some analysts believe the two-year suspension is likely to become permanent, as pushing for a tax increase before the next major election in 2028 is politically almost unfeasible. Sell-off reverberates across global bond markets. US Treasuries resumed trading after Monday's holiday, with investors reacting to Tuesday's crash in the Japanese bond market and escalating tensions between Europe and the US over control of Greenland. Long-term bonds led the decline, with the 30-year Treasury yield climbing as much as 10 basis points to 4.94% and the 10-year yield rising 7 basis points to 4.30%, both reaching their highest levels since September 3rd of last year. Concerns over Japan's fiscal outlook continued to simmer during Asian trading hours, pushing the country's 40-year bond yield above 4%, a fresh record high. This pressure quickly transmitted to global long-term bond markets, with European 30-year bonds also performing weakly. Ronald Temple, Chief Market Strategist at Lazard Asset Management, pointed out:
"Japanese government bond yields have risen to a level where, on a currency-hedged basis, they lose their attractiveness compared to US Treasuries. If JGB yields continue to climb, the rational allocation choice for Japanese investors might be to repatriate funds to their home market."
Andrew Ticehurst, Senior Rates Strategist at Nomura Australia Ltd., added:
"The key new development now is that the United States itself has become a source of uncertainty, rather than the traditional safe haven."
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