Swaps Suggest Foreigner Bets Japan Longer Yield Rebound

A swap market measure is signaling growing expectations among foreign investors that Japan’s super-long bond yields will head higher again.

To gauge overseas investors’ positions on Japanese government bonds, one measure traders watch is the difference in next-day interest rate swaps quoted by the Japan Securities Clearing Corp. and the UK’s LCH. 

The UK clearing house’s 20-year rate has risen to the highest relative to the Japanese firm’s level since December 2023, Bloomberg-compiled data show, suggesting that foreign investors are betting more on bond yields rebounding than their Japanese counterparts.

The gap between the 20-year swap rates of Japan Securities Clearing and LCH has rebounded to minus 1.25 basis points on Wednesday, from minus 4 basis points in late December.

Signs that US President Donald Trump is easing off on his tariff threats against China and interference with Federal Reserve chairman Jerome Powell over policy have reassured investors. Traders are also seeing the chance of another Bank of Japan interest-rate hike this year inching higher after all but disappearing earlier in April. 

Bond investors are becoming more concerned as well that Japan’s government will add to its already-massive debt by increasing fiscal expenditure to support the economy and ramp up defense spending under pressure from the Trump administration to do so.

While some Japanese investors are betting that factors like those will push super-long bond yields higher, the swap market figures suggest overseas traders are seeing even more elevated odds that rates will rise further.

“If overseas players start to expect that super-long bond yields are headed higher, the absence of buyers in the market may become even more pronounced,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management Co.

Yields on Japan’s 30-year sovereign bonds, one of the super-long maturities, have dropped in recent days after touching 2.845% in mid-April, the highest since 2004. Similar-maturity US Treasury bond yields have inched up during the same period to around 4.8%.

“As the US Treasury market settles down, there will no longer be much demand” for super-long Japanese bonds as haven assets due to worries that yields will rise, said Ryutaro Kimura, fixed income strategist at AXA Investment Managers. 

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