Bond markets from US to Japan whacked as inflation and fiscal worries take hold

Long-term sovereign debt yields surged from the United States to Japan and across Europe, driven by mounting inflation pressures and deep-seated anxiety over ballooning government deficits. When bond yields rise, market prices fall.

In the United States, 30-year Treasury yields climbed to their highest level since 2007. This movement follows recent auction results where 10-year notes cleared at yields reaching a 19-year high, while 30-year bond sales hit a 25-year peak. Fueling the U.S. Inflation angst are rising oil prices, which have climbed 50% so far this year to cross above $90 a barrel as hopes for U.S.-Iran peace faded.

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Additional pressure on American public finances stems from domestic policy shifts. The U.S. Supreme Court struck down emergency tariffs previously imposed by President Donald Trump last year, leading to rising tariff refunds that have further strained U.S. Public finances. Analysts also pointed to heightened competition for capital from AI hyperscalers — the technology giants building huge data centres — alongside concerns regarding clear communication from the Federal Reserve under new Chair Kevin Warsh.

In Japan, inflation angst and expectations that Japan could hike interest rates as early as September pushed 10-year borrowing costs to a three-decade high just under 3%. Meanwhile, Japanese 30-year borrowing costs are just above 4%. These more competitive yields are starting to draw in Japanese investors, traditionally big buyers of U.S. Debt, creating another headwind for the U.S. Bond market.

"That doesn't mean Japan is abandoning Treasuries, but it does mean Washington can no longer assume that foreign demand will absorb additional supply at yesterday's yields."

Charu Chanana, chief investment strategist at Saxo Bank in Singapore

Foreign holdings of U.S. Treasuries slid in June, Treasury Department data showed on Monday, led by declines in the holdings of Japan, the biggest foreign holder of U.S. Bonds, the UK and China. Some analysts reckon the Treasury's unusual decision to sell euros and not dollars in recent joint intervention with Japan to bolster a weak yen suggests it does not want bond market strains worsened by foreign central banks selling Treasuries to fund currency-support operations.

In Europe, where high government spending and high debt have weighed on France and Britain, concern that climate events will add to spending pressures was also a factor, along with inflation and stronger-than-expected growth. Germany's 10-year Bund yield touched its highest since 2011, French yields were at their highest since 2009 and Britain's 30-year borrowing costs neared peaks hit in May that marked the highest levels since 1998. Compounding these strains in Europe are supply chain disruptions in Germany with the heat waves leading to those extreme lows in the Rhine levels.

"It's not just oil that people are looking at, but there's a broader inflation picture that kind of keeps the ECB (European Central Bank) hawkish."

Benjamin Schroeder, ING senior rates strategist

Kjersti Haugland, chief economist at investment bank DNB Carnegie, said that bond markets are entering an era where the inflation and rates outlook is more uncertain and the upside risks are greater, leaving behind the post-financial crisis period of low rates and subdued inflation.

"It coincides with the very high level of government debt in many countries, particularly Japan, the U.S., France and the UK."

Kjersti Haugland, chief economist at investment bank DNB Carnegie

The selloff in government bond markets ripples through economies, as sovereign debt sets the benchmark for borrowing costs for companies and other loans such as mortgages. Rising borrowing costs also tighten financial conditions in general, threatening to curb the economic growth that has helped drive stock markets to record highs. U.S. 10-year Treasury yields, at around 4.74%, are trading at levels that in the past have attracted the attention of U.S. Officials, with 5% now in focus.

"This will be very important, not just for bond markets, but also other financial assets as any break higher is likely to undermine confidence. Given the importance of this level, we are likely to see it defended by the U.S. Treasury."

Guy Miller, Zurich Insurance Group's chief market strategist

For some bond investors, rising yields were making the market attractive.

"We are long on duration. I don't expect it (the current bond selloff) will last."

Christopher Dembik, Pictet senior investment adviser

Global Bond Market Pressures At a Glance

• United States: 30-year Treasury yields hit their highest mark since 2007; recent 10-year and 30-year auctions reached multi-decade yield peaks. Foreign holdings, led by Japan, declined in June.
• Japan: 10-year borrowing costs climbed to a three-decade high just under 3%, with 30-year costs rising above 4% ahead of anticipated interest rate adjustments.
• Europe: Germany's 10-year Bund yield reached its highest point since 2011, French yields hit levels unseen since 2009, and British 30-year costs approached 1998 peaks amid climate and supply chain pressures.