It only costs US$280 million to detonate the Japanese bond market, scare the global market, and ignite the

# Source: Wall Street Insights

## By He Hao

A trading volume of merely $280 million was enough to push Japan’s ¥7.2 trillion government bond market to the brink of collapse and send strong shockwaves across global financial markets. Prices of Japan’s benchmark ultra-long-term government bonds plummeted, with the $280 million figure representing the total trading volume of these ultra-long-term bonds on that day:

On Tuesday, Japan’s most closely watched 30-year government bonds recorded a trading volume of only $170 million, while another $110 million worth of 40-year government bonds changed hands, according to data from Japan Bond Trading Co.

Although this trading volume was higher than that in recent sessions, it was a drop in the bucket compared with the $41 billion turnover of Japan’s 10-year government bond futures on the same day.

The above data did not cover all Japanese government bond transactions on Tuesday. There were also trades of so-called "off-the-run bonds" in the market, but their activity was much lower; some investors also bet on interest rate trends through interest rate swaps.

The 30-year and 40-year government bonds were the hardest-hit segments during Tuesday’s trading session. Multiple market participants described it as one of the most chaotic trading days in recent years. During the sell-off, the yields of these two types of bonds once surged by more than 25 basis points, though the market has gradually calmed down since then.

This sell-off pushed yields to record highs, triggering concerns that Japan might be heading for a "Truss moment". It even prompted U.S. Treasury Secretary Scott Bessent to seek explanations, who described the volatility as an extreme "six-standard-deviation" event.

Japanese traders and analysts are still unsure who exactly was behind the sell-off, with market rumors pointing to a mix of primary dealers, hedge funds and domestic life insurance institutions.

But the macroeconomic factors driving the turmoil are relatively clear: Japan is adapting to higher inflation levels, and rising interest rates are disrupting years of market calm. In addition, Japanese Prime Minister Sanae Takaichi’s plan to suspend the consumption tax on food and beverages, seen as a move to gain support ahead of the early general election next month, has also heightened market worries about fiscal policy.

### What Do Analysts Think?

Analyses point out that the huge gap between the scale of market value evaporation and the actual trading volume highlights the liquidity fragility of Japan’s bond market, which is gradually becoming a weak link in the global financial system. For years, this world’s third-largest government debt market has remained relatively calm under the suppression of the Bank of Japan’s large-scale stimulus policies; however, as the Bank of Japan and the country’s domestic life insurance institutions gradually exit the market, the market is now significantly more sensitive to shocks.

Shoki Omori, chief trading strategist at Mizuho Securities in Tokyo, said: "This is not contradictory. In a market with insufficient depth, constrained dealer balance sheets, and where prices are determined by marginal trades rather than volume-weighted averages, such a situation is exactly as expected."

A Bloomberg index shows that the deviation between Japanese government bond yields and their theoretical values soared to a record high this week, indicating that market dislocation is intensifying.

Investors are now being forced to adapt to historic changes in the way Japanese government bonds are traded.

Analysts at JPMorgan Chase noted in a report this week that the "market breadth" indicator, which measures the impact of price fluctuations on trading volume, has deteriorated rapidly. This means that even relatively moderate capital flows can have a huge impact on ultra-long-term bond prices. This stands in stark contrast to the U.S. and German bond markets, where market breadth remains strong.

According to data from the Japan Securities Dealers Association, foreign investors now account for approximately 65% of the monthly spot trading volume of Japanese government bonds, compared with only 12% in 2009. A market once dominated by domestic life insurance institutions is increasingly being swayed by investors with shorter holding periods.

Stefan Angrick, senior economist at Moody’s Analytics, said: "This is not just a problem facing Japan; similar situations exist in the U.S. Today’s U.S. Treasury market is also dominated by investors who move in and out more quickly, rather than the long-term holders of the past. This situation will persist for some time."

By the end of the Asian trading session on Thursday, there were some signs of stabilization in the market. The yield on 30-year government bonds fell by about 5 basis points to 3.66%, but it was still higher than the closing level on Monday.

Traders will closely monitor the Bank of Japan’s policy decision on Friday, as well as any comments from Governor Kazuo Ueda on the market, while also keeping an eye on the auction of 40-year Japanese government bonds next week.

### Risk Warning and Disclaimer

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