Japan Bond Volatility Sparks Contagion Fears Across Asia

A sudden spike in volatility in Japanese government bonds (JGBs) – long seen as among the world’s safest assets – is stoking concern that risk aversion is rippling through Asian markets across asset classes, according to analysts. Investors have repriced the term and risk premiums on JGBs as fiscal worries that started simmering last year have flared again after Prime Minister Sanae Takaichi pledged tax cuts and higher spending. The 40-year bond yield rose above 4 per cent on Tuesday, the highest since its 2007 debut, while the 10-year note temporarily climbed to a fresh 27-year high of 2.37 per cent. While longer maturity JGBs rebounded on Wednesday after government officials called for calm, analysts said more volatility could persist into the first half of this year. “The bond sell-off in Japan could spark a risk-averse sentiment in Asia, with contagion effects on bonds and equities,” said Gary Ng, a senior economist at Natixis Corporate and Investment Bank. The latest JGB turmoil could see some investors forced to sell up to US$130 billion worth of US Treasuries to cut risk across their portfolios, according to a Citigroup Global Markets report on Tuesday.