Short View: Sharp rise in JGB yields

Borrowing costs of 1.45 per cent hardly sound onerous but in the case of Japan, a sharp rise in bond yields to that level is unnerving the government.

Hirohisa Fujii, Japan’s finance minister, said on Tuesday he was “highly concerned” about the rapid rise in 10-year yields. Just a month ago, it was paying 1.25 per cent.

The spike has been triggered by worries that the government will have to borrow more next year than it has so far budgeted for.

These fears are hardly unique to Japan. Governments around the world are sensitive just now because of their extra borrowing and the risks are rising that they too could face sharp jumps in the cost of those loans.

Ideally, markets would adjust steadily and calmly to the fiscal situation as news emerged. But the likelihood is a far lumpier ride. Current low bond yields reflect many factors but one of those is some investor complacency about the economic outlook. This leaves markets wide open to the risk that any reaction to bad fiscal news is very sudden.

Bond markets have a history of savage sentiment changes which can send yields spiking higher. A famous example of such bond vigilantism – with echoes today – was the pain inflicted on the Clinton administration in 1994. Then, bond markets feared rising inflation from a second-year government’s voter-friendly efforts to stimulate an economy struggling to emerge from recession. Ten-year yields jumped 2.5 percentage points in 10 months.

James Carville, the Clinton strategist, afterwards famously claimed he would like to be reincarnated as the bond market: “Then you can intimidate everyone,” he said.

Japan is right to be concerned about the bond market’s unease. Other governments should take note too; episodes far worse are increasingly likely to erupt elsewhere – and they can be very expensive.

John Authers is on sabbatical

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