📝 JGB Liquidity Decline to Amplify Rise In Yields: MUFG

The JGB market is now factoring in more than just fiscal expansion. Indeed, investors are also wary of a renewed drop in liquidity. Even when viewed by maturity or in comparison with the US and Europe, the persistently high bid-ask spreads for super-long JGBs are clear evidence that the market is factoring in more than just fiscal expansion (Graph 3, 4). As pointed out in the aforementioned July 16 report, a decline in liquidity could theoretically continue to push up yields indefinitely when combined with concerns about fiscal deterioration. Therefore, it cannot be ruled out that super-long JGB yields could again nervously rise in the event of some sort of shock. For example, if there is increased speculation on the market about the Ishiba cabinet being replaced by a new cabinet that favors fiscal expansion, selling pressure could possibly increase due to a shortage of buyers (declining liquidity). In other words, there is still a possibility that super-long JGB yields will rise beyond the level suggested by the feasible scale of fiscal expansion, even if only temporarily. - MUFG