Goldman sees Japan bond 'shocks' spilling over to Treasuries

Volatility in Japan’s longer-dated government bonds is on the rise following Sanae Takaichi’s election win, and the moves may spill over to markets as far away as the US and the UK, according to Goldman Sachs Group.

The ascent of Takaichi as the ruling Liberal Democratic Party (LDP)'s president risks pushing up long-end Japanese yields, strategists including Bill Zu wrote in a note. For every 10 basis point "idiosyncratic JGB (Japanese government bond) shock,” investors can expect around two to three basis points of upward pressure on US, German and UK yields, the strategists wrote.

Moves in JGBs have foreshadowed that of their global counterparts this year, with a spike in superlong yields in the Asian nation amplifying ructions fueled by fears of widening fiscal deficits.

Goldman’s warning sharpens the focus on longer-dated notes, which have come under scrutiny as governments ramp up borrowings and inflation proves stickier than expected.

Bank analysts believe that the continued sell-off in long-term Japanese bonds will depend on the evolution of the political landscape, noting that the current uncertainty will keep risk premiums elevated in the near term.

Yields on 30-year Japanese bonds jumped about 14 basis points (bps) during Monday's trading; amid expectations that Takaishi will push authorities to increase government bond issuance to finance tax cuts and stimulate the economy.