TRADING DAY-Japan's long bond warning

Japan's 30-year government bond yield surged to a record high of 3.14%, reflecting declining demand for long-term debt amid global market shifts. This rise follows a poor auction of 20-year securities and highlights Japan's fragile fiscal situation, with a debt-to-GDP ratio exceeding 250%. The widening spread between the 30-year yield and the Bank of Japan's policy rate indicates increased investor risk aversion. Meanwhile, U.S. assets faced declines as Wall Street and the dollar fell, influenced by recent credit downgrades and tax policy uncertainties.

By Jamie McGeever

ORLANDO, Florida, May 20 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

U.S. assets in the red

It was a sobering day for U.S. assets on Tuesday, with Wall Street, the dollar and longer-dated Treasuries all declining as investors took a breather to digest last week's U.S. sovereign credit downgrade and the latest twists in President Donald Trump's efforts to push his sweeping tax-cut bill through Congress.

The general fiscal health of developed economies and rise in long-term yields more broadly are top of investors' minds, and the most significant move in global markets on Tuesday was Japan's 30-year yield hitting a record high. More on that below, but first, a roundup of the main market moves.

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

A junk-rated U.S. Treasury? Markets 'care' about that: Mike Dolan
Trump visits Capitol to try to mend U.S. House Republican rifts on tax bill
BOJ urged to boost bond buying in wake of spike in super-long yields
China cuts key rates to aid economy as trade war simmers
With U.S. and EU deals, Britain embarks on high-risk balancing act

Today's Key Market Moves

Wall Street's three main indices close lower, falling as much as 0.4%. The S&P 500's fall is its first in seven sessions. Curiously, however, the VIX volatility index also falls.
Japan's 30-year yield leaps 16 bps on the day to a record high of 3.14%.
The Australian dollar falls 0.6%, one of the biggest decliners in G10 FX, after the RBA cuts interest rates and leaves the door open to further easing.
Mainland Chinese and Hong Kong-listed stocks rise after China's central bank cuts rates for the first time since October.
Safe-haven gold rises nearly 2% on the back of a weaker dollar, global trade uncertainty, and Wall Street weakness.

Japan's long bond warning

If Tuesday was a relatively calm day across global equity markets, the same cannot be said for Japanese Government Bonds, particularly the long end of the curve after a poor auction of 20-year securities triggered a rush for the exits.

The 30-year JGB yield rose above the previous high from November 2000 to a fresh record peak of 3.14% and is now up more than 40 bps this month, putting it on track for its biggest monthly rise on record.

The spread between Japan's 30-year JGB yield and Bank of Japan policy rate is now 263 basis points, the widest since 2004 and close to the record high around 290 bps from August that year.

The severe weakness of longer-dated Japanese sovereign bond prices is the clearest reflection of a global phenomenon currently underway - declining demand for 'duration', or investors' reluctance to hold long-term government debt.

Of course, Japan's fiscal dynamics are particularly fragile. The country's gross debt-to-GDP ratio of more than 250% is by far the highest in the developed world. For years it sustained that huge debt burden while paying the lowest interest rates in the developed world, but that sweet spot has gone - perhaps for good - and investors are now demanding a much higher risk premium.

In many ways, Japan's situation is unique, but where Japan leads other countries often follow. Public finances and debt dynamics are deteriorating across the G7 and beyond, and ratings agency Moody's last week stripped the U.S. of its triple-A credit rating.

The impact on U.S. assets has been relatively muted so far, although long-dated yields remain elevated, indicating that the move was hardly a shock. Wednesday's 20-year Treasury note auction will be under the spotlight, though, for signs of how strong or otherwise investor demand is.

There will probably always be demand for the most liquid asset in the world's deepest market - it's just a question of price. In that light, interest from foreign buyers at the 20-year auction will be intensely scrutinized, given the growing worries about 'de-dollarization' and Treasuries' 'safe-haven' status.

What could move markets tomorrow?

Japan Tankan non-manufacturing index (May)
Japan trade (April)
Indonesia interest rate decision
UK inflation (April)
U.S. 20-year Treasury note auction
ECB publishes Financial Stability Review
G7 finance ministers, central bank chiefs meeting in Canada