Three charts explain: Why will the Japanese bond market lead to a global collapse?

Author: 2989 Source: X, @punk2898

Goldman Sachs: Why the plummet of Japanese bonds has dragged down the global market.

To help everyone understand, this is --- the DeFi deleveraging in the real world.

How did the Japanese bond market collapse?

1. No one is willing to buy anymore

• Insurance companies are no longer buying: Japanese life insurance companies used to be major buyers of government bonds, but now their asset-liability structure has changed, and they no longer need to purchase so many long-term government bonds.
• Government concerns about finances: The Japanese government is facing elections, and various political parties are talking about tax cuts, which raises concerns among investors that the Japanese government will have even less money, increasing the risk of national debt.
• Reinsurers are selling off: Some insurance companies are transferring assets to reinsurers, who in order to earn more money, are selling Japanese government bonds in exchange for higher-yielding investments.

2. The central bank can't help either

Although the Bank of Japan holds more than half of Japan's national debt, it is powerless in the face of this wave of selling. Market liquidity is poor, with many wanting to sell and few wanting to buy.

How does the Japanese bond market affect the global market?

As interest rates in Japan begin to rise, the cost of borrowing yen increases, making previously profitable arbitrage trades that relied on low rates no longer advantageous. Investors need to repay their loans, leading to a series of deleveraging actions:

• Asset Sell-off: To repay yen loans, investors need to sell the assets they hold (such as stocks, bonds, cryptocurrencies), which will lead to a decline in the prices of these assets.

• Market Volatility: Large-scale asset sell-offs can trigger market fluctuations and instability.

• Changes in capital flow: Funds that previously flowed into high-return markets are now starting to flow back, leading to a decrease in liquidity in these markets and further exacerbating market uncertainty.

After investors sell their assets to obtain US dollars, they need to exchange the US dollars for Japanese yen to repay. Due to a large amount of funds flowing from US dollars to Japanese yen, it further drives the appreciation of the yen.

investors sell assets

What will the future be like?

Deleveraging means reducing debt or leverage. Due to the rising cost of borrowing, investors are forced to reduce debt and sell assets to pay off loans. This behavior can trigger a series of ripple effects globally, leading to falling asset prices and increased market volatility.

In fact, this is no different from the DeFi of the past; it is also a process of deleveraging.

Goldman Sachs believes that this volatility will recur unless there are significant policy adjustments.

The Japanese government may:

1. Reduce long-term government bond issuance
2. Buy back some bonds to stabilize the market

The actions of the Bank of Japan are crucial:

1. The next interest rate hike may have to wait until January 2026.
2. Any adjustments to monetary policy will affect the market