Payden & Rygel: 10 week change in G7 Breakevens
This week, global bond market volatility returned. Despite the headlines, the driver was not the U.S. but news from Japan.
The Japanese 30-year bond yield surged nearly 40 basis points and is now higher than Germany's. Investors point to Japanese Prime Minister Takaichi's pitch to cut taxes as the main reason fueling the surge in yields. But there's more to the story.
First, the jump this week was a continuation of an ongoing trend - the Japanese 30-year bond yield has been rising steadily, with a cumulative increase of 300 basis points since 2022.
Second, most of the rise in Japanese yields was driven by 10-year inflation breakeven, which is the (annualized) additional return investors require to compensate for anticipated inflation over the next 10 years. It turns out that over the last 10 weeks, Japan's 10-year breakeven rate increased by 40 basis points, seven times the average rise across other G7 countries.
Third, the rise in Japanese breakevens makes sense given that the nation's core inflation has remained around 1.6% for over two years, a trend the country has not seen since the 1990s.
So the rise in breakevens and bond yields may reflect a normalization rather than another bond market crisis.