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Long-term yield and yield curve scenarios for February 2026: Market implications of various election outcomes
Long-term and super-long-term JGB yield scenario for February
This month we expect the 10-year JGB yield to digest the outcome of the Lower House election on February 8. A re-escalation of volatility remains possible depending on the election result (see below). Politicians have only 16 days to campaign in this contest -- the shortest period in the post-war era -- which makes it difficult to assess the momentum and flow of the election in real time. That said, all of the major parties have included consumption tax cuts in their campaign platforms (albeit with differences in scope and duration; see Table 4). Whether the ruling coalition wins or loses, it looks difficult to envision concerns over fiscal expansion disappearing anytime soon.
In the bond market, speculation of an upward revision to the Bank of Japan's terminal rate has picked up. In the January Outlook Report, the BoJ noted that a falling yen could lift underlying prices via its impact on inflation expectations. The minutes of the December Monetary Policy Meeting, released on January 28,contained multiple references to currency weakness, including "considering the impact such a low real policy interest rate had on prices through foreign exchange markets, it was appropriate for the Bank to adjust the degree of monetary accommodation" and "considering factors such as the impact of developments in foreign exchange rates on prices, inflationary pressure was likely to continue if current financial conditions were maintained. "February brings a variety of speaking opportunities for hawkish Policy Board members (Kazuyuki Masu on February 6, Naoki Tamura on February 13, and Hajime Takata on February 26), which is likely to prolong expectations of an early rate hike and a higher terminal rate. Separately, the government may submit to the Diet its nomination for a successor to outgoing Board member Asahi Noguchi sometime in late February.
On the other hand, we see little likelihood of the 10-year JGB yield exceeding the recent high of 2.38% and breaking above 2.50%. We have previously argued that the "Takaichi trade" -- characterized by rising stock prices, a falling yen, and falling bond prices -- would at some point reach a saturation level, and we think it may already be there. On January 20, US Treasury Secretary Scott Bessent commented on the sharp decline in the JGB market, stating that there had been "a six-standard-deviation move" over the past two days and that "I am sure that [the Japanese authorities] will begin saying the things that will calm the market down. "And there have been rumors that Japanese and US currency authorities may have intervened on behalf of the yen (a rate check) from the evening of January 23 into overseas trading hours. Finance Minister Satsuki Katayama also declared on January 20 that "I can promise that we have taken -- and will continue to take -- the actions needed to stabilize the market." If long- and super-long-term JGB yields rise significantly once again, we think fiscal authorities would be obliged to consider concrete measures in response. Such actions might not necessarily remove the underlying uncertainty hanging over the fiscal policy outlook, but they would serve to curb any self-reinforcing rise in bond yields.
We expect super-long JGB yields will continue trading nervously as the fiscal year-end approaches. If fiscal expansion concerns ease somewhat or the yen strengthens significantly, speculators are likely to engage in buybacks, driving a bull flattening of the curve. However, persistent selling pressure from investors offloading low-coupon bonds may act as a brake on any such rally. If fiscal concerns intensify or the yen weakens, we would expect to see a gradual bear steepening of the curve.