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It appears that Japan’s ruling coalition is poised to suffer significant losses in its upper house, which may not bode well for USDJPY or JGBs. Both the yen and JGBs have been under pressure leading up to this weekend’s vote, and early polling suggests those concerns may be justified.
Rates on 10-, 30-, and 40-year JGBs surged notably this past week, and the election results could provide the market with additional motivation to push yields even higher. The 10-year JGB briefly touched 1.6% last week, surpassing its previous peak from March.
You can add rising rates in Japan to the growing list of reasons why long-end rates in the US are likely to move higher. If Japanese yields rise further following the election results, either US Treasury rates will increase in tandem, or the spread between Treasuries and JGBs will narrow, bringing the yen carry trade back into the spotlight. Currently, the spread between the US 10-year Treasury and the JGB is around 2.9%, just above the critical support level near 2.85%, which has played a key role over the past few years.
The USDJPY has recently diverged somewhat from the 10-year yield spread, likely reflecting market anxiety about Japan’s deteriorating fiscal situation. This concern has intensified amid rising rates, elevated inflation, new tariffs, and now election results that could trigger increased government spending.
This dynamic will add further pressure to the long end of the US yield curve, especially following last week’s breakout of 5-year CPI swaps from a two-year trading range. If this trend continues, it will become increasingly difficult for US rates not to rise, as the market would clearly be signaling expectations for higher inflation ahead.
This scenario is likely to steepen the yield curve further, as indicated by the 10/2 spread, which has been consolidating for months and now appears to have formed a bull flag pattern. Considering the current market backdrop, the most probable outcome is a yield curve steepening driven by rising 10-year rates pulling away from the 2-year.
So, while Japan’s election results might seem distant and unrelated to US markets, we must remember that global financial systems are deeply interconnected—what happens in Japan’s bond markets can significantly impact US markets. We’ll gain clearer insight into these potential effects when trading opens in Japan tonight at 8 PM ET.
-Mike
Terms By ChatGPT
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CPI Swaps:
Inflation derivatives where investors exchange a fixed inflation rate for actual realized inflation rates (CPI), effectively trading market expectations about inflation.
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Carry Trade:
An investment strategy of borrowing funds at a low interest rate in one currency to invest in assets with higher yields in another currency, profiting from the interest rate differential.
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Bull Flag:
A technical analysis pattern characterized by a sharp upward move (flagpole), followed by a period of consolidation (flag), which often signals continuation of the upward trend.
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10/2 Spread:
The yield difference between 10-year and 2-year government bonds, often used as a measure of yield curve steepness or flatness.
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Yield Curve Steepening:
A condition where long-term bond yields rise faster than short-term yields, increasing the slope of the yield curve.
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Long-end Rates:
Interest rates on long-duration bonds (typically 10 years or more).
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
Subscribe to receive this FREE daily commentary directly in your email
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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