To read the full report, please download PDF.
Post-election scenario for JGB market: Outlook for freshly volatile super-long sector
Long-term and super-long-term JGB yield scenario for July 22-25
Movements in the 10-year JGB yield this week hinge on the results of the Upper House election and subsequent political developments. We think the overall tone of the market will be determined to a great extent by the super-long sector, which has seen renewed volatility ahead of the election. News reports suggest it will be difficult for the ruling coalition to maintain its majority in the Upper House, and the30-year JGB yield hit a new all-time high of 3.2% last week as the market priced in that possibility. We think the super-long sector could react in one of two ways if the coalition fails to secure a majority. Either a sense that all the news is out will help restore liquidity and drive a spate of buybacks, or there will be a further sell-of fueled by heightened uncertainty surrounding the administration and fiscal policy. In the latter case, we could see a sharper rise in JGB yields if liquidity dries up and the 40-year auction on July 23 yields weak results. Which of the two scenarios materializes will probably depend on Prime Minister Ishiba’s decision about his own future, efforts to explore an enlargement of the coalition (or an attempt by the opposition to oust the current administration), and market expectations surrounding these political developments. Long-term yields are expected to follow developments in the super-long sector, albeit in a more restrained fashion.
The forecast ranges shown below assume that the ruling coalition fails to secure a majority. If it manages to keep its majority, that would be considered a positive surprise for the JGB market, and bond yields could fall below the lower limits of the forecast ranges as concerns about fiscal expansion fade
