Vanguard says long-term Treasury bonds have experienced a perfect storm, selling has stopped before the sell-off wave arrives.

Vanguard Asset Management Ltd. was once one of the largest bulls in Japanese government bonds, but earlier this year it suspended its stable buying of long-term Japanese bonds. Before Japanese Prime Minister Naoto Kan decided to call for early elections and propose significant tax cuts, the asset management company withdrew its bet. The plan for substantial tax cuts caused a severe shake-up in the Japanese bond market, pushing long-term government bond yields up nearly 30 basis points to a historic high. "For long-term Japanese government bonds, this is a perfect storm," said Ales Koutny, the international rate manager for Vanguard's active funds. He added, "The fiscal spending a country can do without financial support is ultimately limited." Koutny believes that the weak demand in the 20-year government bond auction conducted on Tuesday, combined with reports of Japanese life insurance companies selling long-term government bonds and the "noise" surrounding increased fiscal spending, have collectively pushed up the 30-year yield.