The bond market is sending a clear message.
The chart below shows the 30-year Japanese government bond yield going back two decades.
Price action is becoming parabolic, as bond investors require more and more premium to hold long-duration Japanese bonds.
Why?
The new Japanese PM decided to unveil a fresh stimulus package worth $120 bn, which is 3% of GDP.
I repeat: 3% of GDP!
In Japan, has been above the Central Bank target for 2.5 years and the Shunto wage negotiations have now produced 5%+ salary bumps for two years in a row.
Yet the BoJ still sets rates as low as 0.5%, and the government is now working on a gigantic fiscal stimulus package on top.
As a result, bond investors extrapolate a future full of inflation risks and macro volatility – and they want to be paid more to hold long-dated government bonds (this is the famous ’’Term Premium’’).
How do you think this will end?
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