Global bond markets are sounding alarms once again. Amid a confluence of resurgent inflation expectations, fiscal concerns, and geopolitical shocks, a renewed wave of selling has swept through global bond markets in recent trading sessions. Notably, yields on both the 10-year Japanese Government Bond (JGB) and the 30-year U.S. Treasury have breached critical levels, with markets flagging potential crises for both.
The 10-year JGB yield surged past 2.8% during Asia-Pacific trading on May 18, climbing over 10 basis points shortly after the open to hit its highest level since October 1996. The 30-year JGB yield jumped nearly 20 basis points, surpassing 4.20%. Beyond persistent high inflation expectations, a Japanese government source indicated that new debt issuance might be considered to fund a supplementary budget aimed at cushioning economic impacts from Middle East conflicts. Any new issuance would worsen Japan's already strained fiscal position and could accelerate the rise in long-term bond yields.
Nomura Securities strategist Naka Matsuzawa noted that "bond vigilantes" have issued three warnings on economic policy management since the Sanae Takaichi administration took office. The current wave, however, differs from prior episodes: its triggers are external—including Middle East conflict-driven oil price increases, the complete evaporation of Federal Reserve rate cut expectations, and a renewed deterioration in UK political risks—prompting foreign investors to exit JGBs. Furthermore, the selling is now centered on the 10-year JGB yield, which more directly reflects market-neutral rate expectations, rather than ultra-long-term bonds typically driven by supply-demand dynamics, suggesting this is not merely panic selling. Matsuzawa warned that with Japan's Ministry of Finance recently deploying forex intervention tools, available policy measures to stabilize markets have diminished. It would be risky for authorities to dismiss this turbulence as mere panic selling again.
The backdrop is a global bond selloff that domestic Japanese policy alone cannot counter. By the close on May 15, the 30-year JGB yield had already broken above 4%, while the 30-year U.S. Treasury yield reached 5.12%, its highest closing level since July 2007. The 30-year UK Gilt yield also soared about 20 basis points to its highest since 1998. Long-term bond yields in Germany, Spain, and Australia moved higher in tandem.
Priya Misra, a portfolio manager at J.P. Morgan Asset Management, described the past week as another "perfect storm" for global bonds, with rising inflation data and a surge in global rates led by JGBs and UK Gilts. Markets now fear that rising yields in major economies will tighten financial conditions as these economies grapple with persistent energy shocks.
Currently, Japan's 10-year break-even inflation rate has risen to 2.15%, raising doubts about the Bank of Japan's ability to maintain its 2% inflation target. The yen has weakened beyond 158 against the dollar, and Japanese equities face downward pressure from the dual instability of bonds and the currency, heightening risks across Japan's stock, bond, and forex markets. Japanese Finance Minister Shunichi Suzuki noted last week that government bond yields are rising in the world's largest bond markets, with these developments influencing each other to create a compounding effect.
The 30-year U.S. Treasury yield broke above 5%. Overseas bond selling is exacerbating JGB pressures, and vice versa. Japanese investors hold approximately $1 trillion in U.S. Treasuries, making them the largest foreign holders. With JGB yields at historic highs, some asset managers are betting on a repatriation of Japanese funds from abroad. Mark Dowding, Chief Investment Officer at BlueBay Asset Management, stated that incremental Japanese capital may no longer flow overseas to U.S. corporate bonds or Treasuries but could instead be allocated domestically. BlueBay launched its first Japanese bond fund in March.
After the 30-year U.S. Treasury yield hit a closing high of 5.12% last week—its highest since July 2007—it climbed further to around 5.14% by midday on May 18. Michael Hartnett, Chief Investment Strategist at Bank of America, previously warned that a decisive break above 5% for the 30-year yield would be akin to "opening the door to doom." The yield is now 14 basis points above his warning level and breaking through multiple technical resistance levels established since 2023, potentially triggering a historic VaR (Value at Risk) shock and causing a sharp, short-term spike in Treasury yields.
Hartnett also noted that Kevin Warsh potentially succeeding as Fed Chair could introduce additional uncertainty. Historical data suggests U.S. Treasury yields have risen an average of about 50 basis points within three months of a new Fed Chair taking office. If this pattern repeats, the 2-year yield could rise to 4.53% and the 10-year to 4.93%.
Chris Lau, Senior Portfolio Manager for Fixed Income at Invesco, stated that this year is a transition period for Fed policy amid persistent inflation, creating significant uncertainty, especially considering recent geopolitics and oil prices. However, with no clear U.S. recession in sight, the Fed lacks urgency for rapid rate cuts. The base case remains that the Fed may not cut rates this year or might implement at most one cut. Consequently, the 2-year U.S. Treasury yield will likely remain in a 3.7%-4.2% range, but longer-term yields could rise further due to fiscal supply or inflation premium pressures, maintaining a relatively steep yield curve.
Regarding concerns that high U.S. fiscal deficits and massive Treasury supply could long suppress Treasury prices and raise debt sustainability risks, Lau noted that U.S. fiscal policy is indeed a market worry. The deficit is projected to reach around $2.1 trillion in 2026, roughly 6% of U.S. GDP, with this share potentially rising further. In the short term, the U.S. Treasury will have to increase issuance, continuing to pressure Treasury prices. Additionally, the willingness of some investors, including foreign central banks, to hold U.S. Treasuries has declined over the past one to two years. If the market requires higher yields to absorb Treasury supply, structural debt sustainability issues could emerge.
Hartnett also cautioned that history repeatedly shows many bubbles end with sharp spikes in U.S. Treasury yields, such as the 230-basis-point rise in JGB yields in 1989 and the 260-basis-point jump in U.S. yields in 1999. Currently, the Nasdaq index and the 10-year U.S. Treasury yield are both rising sharply on an annualized basis, echoing the cyclical turning points of 1989 and 1999.
Lau added that U.S. Treasury movements will inevitably impact global risk-free rates and the pricing of major asset classes in two key ways: First, many assets use the risk-free rate to calculate discount rates for valuation. Stocks, particularly growth and tech stocks, could see their valuations affected if a higher risk-free rate is applied. Second, for credit bonds, higher yields would benefit investment-grade bonds, especially shorter-duration portfolios, as a higher entry point generally translates to higher returns, leading markets to favor assets with shorter investment cycles.
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