MS Japan Rates Strategy Fiscal Risk Keeps JGB Long End Under Pressure

M August 21, 2026 09:03 AM GMT

Japan Rates Strategy | Japan Morgan Stanley MUFG Securities Co., Ltd.+ Idea

Fiscal Risk Keeps JGB Long End

While the Treasury's buyback announcement may cap super- long USTs sell-off, it should not remove the Japan-specific fiscal and political risks weighing on super-long JGBs. With FY2027 budget requests due by end-August, we remain bearish the sector and expect demand to stay limited to short-covering.

Key Takeaways The UST buyback announcement helped the JGB belly outperform via lower USD/ JPY channel, but it would not remove the Japan-specific pressures on super-long JGBs.

FY2027 budget requests could revive fiscal deterioration concerns by end- August, with METI alone seeking around JPY7.7 trillion, more than double last year.

July offshore buying of super-long JGBs suggests flattener demand rose, and those positions could take losses if fiscal concerns are rekindled by end-August.

Shift the JGB 20s25s steepener into a short 20s25s35s fly as renewed lifer selling could cheapen the 25y sector relative to 35y.

Meanwhile, BoJ hawkishness and tighter financial conditions should leave limited room for the inflation risk premium in the belly to widen further.

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Interest Rate Strategy Japan | Fiscal risk keeps JGB long end under pressure

Koichi Sugisaki MORGAN STANLEY MUFG SECURITIES CO., LTD. Hiromu Uezato

Could US Treasury's buyback announcement change JGB yield trend?

The JGB yield curve continued to bear-steepen in the first half of the week in line with global trends amid still-thin domestic trading. However, the belly zone ended up outperforming over the week as a whole after the US Treasury Department’s announcement of an increase in its buybacks beyond the 10y sector appeared to arrest the market’s momentum, at least temporarily.

Market participants are now likely to be focusing on the potential reversal of the recent global bond yield sell-off. Our US rates strategists believe that bear-steepening trend has been driven less by concerns about fiscal deterioration risk and supply/demand pressures associated with the recent surge of AI-related corporate bond issuance than by rising energy prices as well as uncertainty pertaining to central banks’ policy-reaction functions.

Our US rates strategists view the buyback announcement as a clear signal that the Treasury Department is keeping a very close eye on the super-long portion of the UST curve and, moreover, now see an increased likelihood of super-long (coupon-bearing) bond issuance being cut back to levels more commensurate with market demand.

While such measures could indeed help to stabilize the UST super-long sector to some degree, they now see markets refocusing their attention on the Fed’s policymaking and/or fundamentals and, as such, basically expect the curve to bull-steepen if forthcoming data are suggestive of further cooling of the economy.

Japan, of course, shares the world’s concerns about the risk of inflation being fueled by the ongoing Middle East conflict and associated upward pressure on energy prices.

As we discussed in "Hike Pricing Favors Belly", JGBs are also facing some idiosyncratic (Japan-specific) headwinds amid continuing uncertainty vis-à-vis the Takaichi administration’s fiscal policy ambitions as well as the possibility of a Cabinet reshuffle. These political catalysts are liable to persist…