Bond Selling Widens on Supplementary Budget Talk; 10-Year Yield at 2.8%

2026-05-18

Bond Selling Widens on Supplementary Budget Talk

The rise in Japanese government bond yields shows no sign of stopping. After Prime Minister Sanae Takaichi said she was considering a supplementary budget for fiscal 2026, concerns over deteriorating public finances spread and bonds were sold across a wide range of maturities.

10-Year Yield Hits 29.5-Year High

In the domestic bond market on the 18th, the yield on newly issued 10-year government bonds briefly rose to 2.8%, the highest level in 29 and a half years. Compared with the previous Friday, it at one point rose 0.1 percentage point.

Ultra-long bonds with remaining maturities of more than 10 years, which are especially sensitive to fiscal risk, were notably sold off. The 30-year bond yield briefly rose 0.145 point to 4.2%, while the 40-year yield climbed 0.11 point to 4.345%, both setting record highs for consecutive days.

Behind the renewed focus on a supplementary budget was a shift in the government's stance. On the 18th, the prime minister said the government had begun considering fiscal measures with an eye toward compiling a supplementary budget bill for fiscal 2026. The government plans to decide by month-end whether to proceed, and at a government-ruling coalition liaison meeting held at the prime minister's office, she asked the ruling parties to consider subsidies for summer electricity and gas bills.

The prime minister said that, amid prolonged turmoil in the Middle East, the government would "make appropriate judgments so that economic activity and people's lives are not disrupted, and respond promptly if necessary." She added that she had instructed officials before the Golden Week holidays and Finance Minister Satsuki Katayama last week to consider securing funding, including through a supplementary budget, and emphasized that the government would "take every precaution from the standpoint of minimizing risk."

The market reaction was strong because, even as oil prices continued to rise, the government had so far denied the need for a supplementary budget. As of the 11th, the prime minister had said, "We do not believe the situation requires immediate compilation."

Deficit Bonds Also Emerge

There are expectations that the subsidy fund supporting price restraints on gasoline and other items, restarted in March, could be depleted as soon as June. Support for electricity and gas bills is also expected to resume for July through September, and some believe the 1 trillion yen reserve fund in the fiscal 2026 budget may not be enough.

Inside the government, an idea is also emerging to issue deficit-covering bonds as a funding source if a supplementary budget is compiled. As of May, there is not enough basis to revise this year’s tax revenue estimate. Yusuke Igawa, market strategist at BNP Paribas Securities, said, "It has become unclear where expansionary fiscal policy will come to an end."

Government bond yields have continued to trend higher under the Takaichi administration, which advocates proactive fiscal spending. Just before Takaichi became president of the Liberal Democratic Party in October 2025, the 10-year bond yielded 1.66% and the 30-year bond 3.15%. With the recent rise, the increase since before her party leadership victory has reached around 1 percentage point.

Rising interest rates reflecting concern over fiscal expansion are also part of a global trend. In the UK, where political uncertainty has grown after the ruling party's heavy losses in local elections, the 30-year bond yield hit 5.8% last week, the highest in 28 years. The background is growing pressure on Prime Minister Starmer to step down, while pro-stimulus Burnham, the mayor of Manchester, has emerged as a strong potential challenger.

In the United States as well, the 30-year bond yield rose above the key 5% level, reaching a one-year high. Defense spending is set to increase due to attacks on Iran, and after the Supreme Court rejected the legal basis for the "Trump tariffs," large refunds to importers are also expected to begin. If interest rates, which serve as benchmarks for investing in financial assets, rise further, market instability could follow.

On the 18th in Paris, Finance Minister Katayama told reporters, "The prime minister has instructed us to minimize every risk." Takashi Yamawaki, head of bond research at J.P. Morgan Securities, said, "Yields will stop rising either when stock prices fall further and demand for bond investment increases, or when the government clearly presents the future of fiscal policy."

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