Deutsche Bank highlights a significant "elephant" currently present in the global fixed income market: the flattening trade in the Japanese Government Bond (JGB) yield curve between the 2-year and 30-year maturities. According to analysis from Deutsche Bank's strategy team on February 9th, this spread possesses remarkable potential for compression from a valuation perspective, with an estimated flattening scope of up to 100 basis points. For investors, this represents a substantial mispricing opportunity, indicating a serious disconnect between the market's current pricing logic and fundamental economic realities. With the Japanese election concluded, the policy choices of the new government are poised to act as a critical catalyst. Should market pricing revert to rationality, this structural trade offers an attractive risk-reward profile. Even with relatively wide stop-loss parameters, the potential upside is significant enough to warrant an ambitious strategy targeting this major opportunity.

A Dual Valuation Mismatch: Underestimated Short-Term Rates and Overestimated Long-Term Forward Rates A deeper analysis of valuations reveals two core contradictions in the Japanese bond market identified by Deutsche Bank's research. Firstly, considering current wage dynamics, Japan's real policy rate is excessively low, both in absolute terms and in cross-market comparisons. This suggests an inherent upward pressure on short-term rates to align with economic conditions. Secondly, from a long-term perspective, Japan's substantial net foreign asset position implies that long-term forward rates appear too high relative to other markets. This combination of artificially low short-end rates and elevated long-end rates has created an unsustainably steep yield curve. This extreme valuation anomaly is the proverbial "elephant in the room"—obvious yet temporarily ignored by the market. Once a mean reversion process begins, the spread between 2-year and 30-year JGB yields is likely to undergo a sharp compression.

The Hard Constraint of Political Reality: Inflation Emerges as the Top Concern for Voters Beyond pure valuation metrics, shifts in the political landscape provide solid logical support for this trade. The Deutsche Bank report notes that in a country with massive private sector savings, high inflation is politically highly undesirable. Recent polling data clearly reflects this, with cost-of-living issues emerging as the primary concern for voters by a significant margin. In this climate of public sentiment, continuing with loose policies akin to "Abenomics 2.0" is not only economically unsound but also politically untenable. With the election over, the new government faces clear pressure from public opinion, inevitably tilting the policy balance towards inflation suppression. To address voter demands for controlling living costs, policymakers will likely have to tolerate or even actively promote a flatter yield curve. This would involve tightening policy at the short end to curb inflation expectations, thereby securing political viability.

Potential Shift in Central Bank Policy: Low Tolerance for Market Weakness Although the Bank of Japan (BOJ) did not deliver convincingly hawkish signals at its most recent meeting—potentially confusing some market participants in the short term—subsequent developments have revealed policymakers' true bottom line. Deutsche Bank strategists observe that authorities have since demonstrated very low tolerance for further weakness in the currency and bond markets. This indicates that the aforementioned political pressure—public discontent with inflation—is translating into actual policy considerations. While the BOJ's verbal guidance remains cautious, its behavior suggests an inability to ignore the negative feedback from disorderly moves in the yen and government bonds. Consequently, the earlier thesis is being validated: the new government's policy choices will support yield curve flattening. For traders, the current substantial pricing dislocation not only offers a lucrative target but also allows for significant flexibility in strategy execution, making the present an opportune moment to act on this macro view.