Longer dated Treasuries sold off yesterday, perhaps partially the result of the rout in Japanese bonds as that country experienced its weakest auction demand for its debt since 2012. Concern is rising that demand for government debt globally is failing to keep up with supply.
The country’s 20-year bond is now at its highest yield since 2000, and the 30-year bond is at the highest yield since the maturity was first sold in 1999.
The surge in yields underscores structural challenges particular to Japan’s debt market and its prolific need for funds because of government spending.
The Japanese yield curve is the steepest among major economies, primarily the result of its fiscal issues and the limitations as to where and how to fund its spending.
Some are calling for central bank intervention, akin to what Britian was forced to do in 2022 when its new Prime Minister, Liz Truss, amongst other things proposed a significant tax cut while increasing spending, causing British yields to soar and the pound to decline. [Truss was only in office for 49 days]
Some are fearful that such a crisis can unfold in the US. As noted the other day, the Federal Reserve intervened in the Treasury market during the week of May 5 when the Fed stealthily purchased $43.6 billion in long dated 30-year bonds, of which $8.8 billion was purchased on May 8, the date of the $25 billion 30-year Treasury bond auction.
Equites were weak yesterday following a stellar rally from their April lows that have now pushed the indices into overbought conditions.
Economic data was sparse with many participants parsing comments from Federal Reserve speakers. The fractious budget negotiations ensured that attention would remain focused on the growth in deficit spending and its possible implications on long-dated Treasury yields.
Last night the foreign markets were down. London was down 0.01%, Paris down 0.51% and Frankfurt down 0.19%. China was up 0.21%, Japan down 0.61% and Hang Seng up 0.62%.
Futures are down about 0.75% on concerns about rising deficits and long dated bond yields. The dollar fell and oil rose on a report that Isreal may be preparing for a possible strike on Iran’s nuclear facilities. The 10-year is off 11/32 to yield 4.53%.
