Yield on 2-year JGB flat at 0.755%

Yield on 2-year JGB flat at 0.755%

The yield on 2-year Japanese government bonds (JGBs) remained stable at 0.755% as of June 17, 2025, according to the latest data from the Ministry of Finance [4]. This stability comes amidst broader market volatility and a shift in investor sentiment towards long-term bonds.

Foreign investors have been withdrawing from Japanese long-term bonds, with a net outflow of 334.4 billion yen ($2.3 billion) in the fourth consecutive weekly sale through May 24 [1]. This trend is driven by concerns about inflation and interest rates, as well as fiscal worries in developed markets. The central bank's scaling back of bond purchases and political debates over stimulus have contributed to the sell-offs.

Despite the sell-off in long-term bonds, Japanese stocks remained popular among foreign investors, with a net addition of 309.3 billion yen ($2.1 billion) in domestic shares over the same period [1]. Meanwhile, Japanese investors reduced their net purchases of foreign long-term bonds to 92 billion yen, down from 2.83 trillion yen the previous week [1].

The Bank of Japan (BOJ) is considering a reduction in the pace of its Japanese government bond (JGB) tapering. The central bank is reportedly weighing a plan to cut quarterly purchases to 200 billion yen ($1.4 billion) starting in April 2026 [2, 3]. This move aims to address rising yields on ultralong bonds and the volatility in the bond market.

The recent auction of 40-year JGBs in late May saw a bid-to-cover ratio of just 2.2, highlighting the market's subdued appetite for super-long positions [5]. The auction results underscore a broader problem: traditional buyers of super-long bonds—life insurers and pension funds—are backing away due to regulatory constraints and a lack of yield appeal. The BOJ's reduced bond-buying program has also left a void in demand.

Investors are increasingly concerned about Japan's fiscal situation. With a debt-to-GDP ratio exceeding 200%, even a modest rise in yields could trigger a fiscal death spiral. The BOJ finds itself in a no-win scenario, with its quantitative tightening program pushing yields higher and risking a full-blown bond market panic if it continues. Meanwhile, the Japanese government's fiscal recklessness is compounding the problem, with interest costs already consuming 24% of tax revenue.

The yen carry trade, where investors borrow yen at near-zero rates to invest in higher-yielding assets, is unraveling. With 30-year JGB yields near 3%, the yen's real yield has turned positive, luring capital back to Japan. This has led to yen appreciation and a potential slow-motion collapse of the yen carry trade, with global liquidity and risk assets being affected.

References:
[1] https://www.tradingview.com/news/reuters.com,2025:newsml_L3N3S105P:0-japanese-long-term-bonds-register-fourth-weekly-outflow-on-inflation-fiscal-concerns/
[2] https://www.tradingview.com/news/forexlive:10cf4eeae094b:0-icymi-bank-of-japan-to-consider-halving-jgb-taper-pace-from-2026/
[3] https://asia.nikkei.com/Economy/Bank-of-Japan/BOJ-weighs-slowing-pace-of-tapering-JGB-purchases
[4] https://www.tradingview.com/news/reuters.com,2025:newsml_L1N3SF02Y:0-super-long-jgb-yields-rise-after-weak-auction-reversing-earlier-declines/
[5] https://www.ainvest.com/news/japan-super-long-bond-crisis-boj-tapering-tightrope-investors-heed-warning-signs-2506/