US Treasury Yields vs Japan's Shifting Bond Signals: A Tale of Two Markets

US Treasury yields and Japan's bond market are sending mixed signals to investors. On one hand, US Treasury yields rose across the board on August 28, with the front end (1- and 2-year securities) rising rapidly due to rate hike expectations. The spread between the 20-year and 30-year finished 0.4bp lower, indicating that an investor extending from twenty years of duration to thirty is now being compensated with nothing.

However, in contrast, Japan's Ministry of Finance data shows numerous records have already been set across maturities by September. Prime Minister Sanae Takaichi's expansionary fiscal agenda has led to the need for vast quantities of funding, prompting a debt selloff, mostly in short-term US debt, between July 30 and August 26.

Japanese Government Bond (JGB) yields had risen alongside US Treasuries, but for different reasons. The Bank of Japan's exit from near-zero rates and its tapering of purchases combined with the expansionary fiscal agenda led to a surge in JGB yields. However, early September saw a tentative sign that Japanese institutions are returning to domestic bonds, with the 'super-long' segment dropping 16-18 basis points after a well-covered 30-year JGB auction on September 3.