German Bond Rout Goes Global as Yields Surge in Japan, ANZ #JapanFinance

(Bloomberg) — Japan’s government bond yields reached their highest levels in more than a decade and yields in Australia and New Zealand also surged as the rout in German bunds reverberated through global debt markets.

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The yield on Japan’s 10-year note climbed to 1.5%, the highest since 2009, while the 40-year equivalent jumped to a level unseen since its inception in 2007. Government bonds in Australia and New Zealand followed the selloff, with their benchmark 10-year yields both rising about 10 basis points, while Treasuries slid for a third day.

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The rout comes after the 10-year German bund yield soared as much as 31 basis points due to a dramatic change in the country’s spending plans for defense and infrastructure investments in response to the US pullback from its commitment to European security. The euro had its best three-day rally since 2015 ahead of the European Central Bank’s policy meeting on Thursday.

“We are now in the middle of a historic shift” in economic and defense policies, said Hideo Shimomura, senior portfolio manager at Fivestar Asset Management Co. in Tokyo. “We can’t be bullish on bonds until we see the direction of that shift.”

Bund futures extended Wednesday’s decline, with markets paring wagers on further rate cuts by the ECB as expectations build around the scale of borrowing required to finance spending plans to counter the threat of Russian aggression. Analysts polled by Bloomberg almost unanimously predict a quarter-point decrease in the rate by the central bank.

READ: ECB to Cut Again But Tensions Cloud Path Beyond: Decision Guide

“Investors may not have expected developments to this extent in Germany, and they will need to reconstruct their views going forward,” said Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management. “The impact of the large rise in German yields yesterday was very strong, and US government bonds were also sold.”

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Treasury traders will be mindful of Donald Trump’s social media post on US government funding running out next week. The US president said he was working on a bill on a continuing resolution to fund the government until September.