Trump's tough speech combined with weak demand for Japanese bond auctions intensifies the global market sell-off.

After US President Trump announced that there will be a "very strong strike" against Iran in the next two to three weeks, the weak performance of the benchmark Japanese government bond auction further intensified the global market sell-off. Due to concerns in the market about rising energy costs driving inflation, the demand for the ten-year Japanese government bond auction hit its weakest level since May last year with a bid-to-cover ratio of 2.57, lower than last month's 3.3, and also lower than the 12-month average of 3.28. Another signal of weak demand for Japanese government bonds in the auction is the tail (the difference between the average bid price and the lowest bid price) widening significantly from 0.06 last month to 0.36. As a result, the yield on Japan's ten-year government bonds temporarily rose by nine basis points to 2.39% on Thursday, matching the highest level in nearly 30 years. Ryutaro Kimura, Senior Fixed Income Strategist at Axa Investment Managers, said, "Bond investors seem to have become more cautious in their bidding following Trump's speech." "Concerns in the market about the vulnerability of Middle Eastern energy supply possibly worsening could exacerbate Japan's inflationary pressures and put upward pressure on interest rates." As the Japanese government bond auction performed poorly, more investors are speculating that the Bank of Japan may need to tighten its policies in response to the weakening yen. Currently, the yen exchange rate hovers around 160 yen per US dollar. Overnight index futures show that traders expect a 70% probability of a rate hike by the Bank of Japan in April and have fully factored in expectations of a 25 basis point rate hike before July. Wee Khoon Chong, Senior Market Strategist for BNY in the Asia-Pacific region, said, "The unexpectedly weak auction results, especially following multiple stable auctions in March, are particularly prominent. With the current yield on Japan's ten-year government bonds close to recent highs, this is worth paying attention to, as it may reflect market concerns about high oil prices and a weakening yen pushing up inflationary pressures." It is worth noting that the rise in Japanese bond yields is crucial not only for the US but also for global financial markets today. For many years, Japan has suffered from deflation and, since 2016, the Bank of Japan has implemented a yield control policy. Under this policy, the Bank of Japan has kept short-term loan rates at negative levels and has aimed to keep the yield on ten-year Japanese government bonds at zero. These low rates, combined with rates significantly higher in other parts of the world than in Japan, have prompted global investors to borrow yen and convert it into dollars or euros to invest in European and American stocks, bonds, and emerging markets. The challenge facing global financial markets is that the narrowing gap between Japanese and US bond yields may lead to the unwinding of yen-based arbitrage trades and prompt capital flows back to Japan, causing other markets to experience pullbacks. For example, in August 2024, a sharp rise in Japanese bond yields led to massive unwinding of yen arbitrage trades, causing turmoil in the global markets. The US market, in particular, is vulnerable to such shocks. Japan is the largest foreign holder of US bonds. If Japanese investors decide to withdraw funds from the US bond market due to rising domestic bond yields, the US bond market would lose a crucial buyer. The fluctuations in US bond yields would directly affect US stock valuations. Trump's tough speech reverses global market trends In his speech on Wednesday night local time, Trump unilaterally declared a "rapid, decisive, overwhelming victory" in the conflict with Iran, stating that the core strategic goal of the US in the conflict with Iran is "close to completion". Trump said, "The Iranian navy has been completely destroyed, and its air force and missile projects have also been severely affected." However, one of Trump's other statements frightened the markets. Trump said, "In the next two to three weeks, we will launch extremely fierce attacks against them... at the same time, negotiations are ongoing." Trump also stated that if Iran does not reach an agreement with the US in the next two to three weeks, the US military will target key Iranian targets, "strike them very viciously at every power plant," and may also target Iranian oil facilities. Just a day before, signals of easing tensions between the US and Iran had brought much-needed relief to global markets. While signing an executive order at the White House on March 31, Trump told the media that the US might end military action against Iran in two to three weeks. Iranian President Pezheshyan stated on March 31 that Iran has the "necessary willingness to end the war" if the other party meets Iranian demands, especially by making necessary guarantees of non-aggression. Trump's latest speech shattered hopes in the market that the conflict in the Middle East could be resolved quickly, reversing the trends in global markets on Wednesday. Markets across Asia Pacific were under pressure on Thursday, with European stocks also weakening, and US stock futures all falling. Spot gold fell by 2.54% to $4637.51 per ounce; spot silver fell by 4.65% to $71.59 per ounce. US bonds fell the yield on two-year US Treasury bonds rose by 4.3 basis points to 3.846%; the yield on ten-year US Treasury bonds rose by 5.5 basis points to 4.375%, approaching the 8-month high of 4.43% reached at the end of March. Meanwhile, oil prices soared, with Brent crude futures rising by over 7% to $108.60 per barrel and WTI crude futures rising by nearly 7% to $107.08 per barrel. The US dollar index (DXY) rose by 0.47% to 100.12. Nick Twidale, Chief Market Analyst at AT Global Markets, said that global markets may have more downside today. Despite Trump's statement that the war is ending, the crucial information that there will still be attacks on Iran in the coming weeks is extremely negative for the market. Dilin Wu, Research Strategist at Pepperstone Group, bluntly stated that Trump's speech was "indeed disappointing." Trump's previous statements about withdrawing from the Middle East now seem more like an attempt to appease the market while retaining pressure options. He clearly still favors the strategy of SINCERE pressure to de-escalate the situation rather than a straightforward cooling off. Trump's latest speech may further exacerbate deeper concerns in the market about the impact of high oil prices on the global economic outlook. Investors are increasingly assessing the impact of sustained high oil prices, as the expectation in the market is that the obstruction of shipping through the Strait of Hormuz may continue to weigh on fundamentals. This critical passage, responsible for about one-fifth of the global oil and gas exports, remains effectively closed to most vessels. Although Trump said that the Strait of Hormuz will naturally reopen after the war ends, he did not provide specifics on how this will be achieved. The timetable for when the strait will reopen is currently a focal point for investors. Economist Claudio Irigoyen at Bank of America has already warned that due to the impact of the conflicts in the Middle East, the global economy will face slowing growth and rising inflation. Even if the conflict is resolved in a few weeks, international oil prices are expected to remain around $100 per barrel for the whole year.