Goldman sees Japan bond 'shocks' spilling over to Treasuries

(Bloomberg) -- Volatility in Japan's longer-dated government bonds is on the rise following Sanae Takaichi's election win, and the moves are likely to spill over to markets as far away as the US and UK, according to Goldman Sachs Group Inc.

The ascent of Takaichi risks pushing up long-end Japanese yields, strategists including Bill Zu wrote in a note. For every 10 basis point "idiosyncratic JGB shock," investors can expect around two to three basis points of upward pressure on US, German and UK yields, the strategists wrote.

Yields on Japan's 40-year debt soared as much as 17 basis points on Monday as traders wagered that Takaichi's pro-stimulus stance may prompt authorities to sell more government bonds. It added to pressure on long-dated debt around the world, with yields on UK and US 30-year bonds up as much as seven basis points to 5.57% and six basis points to 4.77% respectively.

"Japan has been a net exporter of bearish shocks onto global long-end rates this year," Goldman's strategists wrote in an Oct. 5 note. "We expect the news of Ms. Takaichi's election as LDP President to result in higher long-end JGB yields and a steeper curve."

Moves in Japanese government bonds have foreshadowed that of their global counterparts this year, with a spike in super-long 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.

Some debt offices and central banks have announced measures to support long-dated bonds in recent weeks, with Japan's finance ministry proposing to trim issuance of super-long term government bonds in upcoming auctions.

Whether the renewed long-end selloff has staying power depends on how the political landscape evolves, Goldman's strategists wrote in the note.

Takaichi, who is poised to become Japan's first female prime minister, was a surprise winner for many investors positioning for political scion Shinjiro Koizumi to secure the leadership. Bond investors had been wary of fiscal spending even before Takaichi's win, with opposition parties calling for tax cuts.

A 30-year bond sale scheduled for Tuesday may shed further light on investors' appetite for the nation's bonds.

What Bloomberg Strategists Say...

"The 40-year move shows investor concern that Takaichi's pro-stimulus stance will revive concerns about debt issuance."

Garfield Reynolds, Markets Live strategist.

"The long-end of the JGB curve has been decoupled from its usual cyclical drivers for some time, and increased uncertainty will likely keep long-end risk premia higher for now," Goldman's strategists wrote.

--With assistance from Masaki Kondo, Alice Atkins and David Watkins.

(Updates market moves in the third paragraph)

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