Japan leads global long-bond drop as spending takes centre stage

Straits Times

15-07-2025

The yield on Japan's 30-year notes jumped the most in two months and those on similar-maturity German bonds flirted with their loftiest levels in 14 years.
Yields for long-term debt from Japan and Germany to the UK and France rose on July 14 as growing concern over widening fiscal deficits dented demand.
The yield on Japan's 30-year notes jumped the most in two months and those on similar-maturity German bonds flirted with their loftiest levels in 14 years. For these countries, fiscal concerns are usurping central-bank interest-rate policies as the main factor to watch. While the selloff is less pronounced in the US, 30-year yields there still touched the highest in a month.
Japanese election largesse and Mr Donald Trump's weekend tariff announcements were the immediate cause of the latest nudge higher. They tapped into deeper concerns about excessive government debt, fire-hose spending, too many bonds coming to market, and inflation that's still much too sticky in developed markets around the world.
'Monetary policy has taken a backseat as primary policy focus, to be replaced by what is happening with budgets and national debts,' said Mr Benoit Anne, senior managing director and head of markets insights group of MFS Investment Management.
That's all well and good if investors are willing to finance it, Mr Anne said, but past episodes have shown that investors can quickly develop 'an acute case of fiscal profligacy skepticism.'
While shorter-maturity yields track the path of interest rates more closely – and are posting smaller moves on the expectation of cuts – a loss of appetite at the long end of the yield curve is a more direct reflection of the fear that growing piles of sovereign debt around the world could ultimately reach a tipping point.
In the US, the rate on 30-year debt was up three basis points to 4.98 per cent as of 11am in New York and has now risen more than 20 basis points since the start of the month.
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'The 30-year Treasury is right around 5 per cent and likely breaks back up,' said Mr George Bory, chief investment strategist, fixed income at Allspring Global Investments, on Bloomberg Radio July 14. 'The reality is deficit spending by governments is very prevalent around the world and the relief valve is the long end of the curve.'
Investors remain uneasy over the prospect that Trump's One Big Beautiful Bill Act will add trillions to the national debt pile over the coming decade.
Still, those concerns have eased in recent weeks, and the nation's 30-year debt has performed better than most developed nation peers year-to-date, despite dizzying swings. Traders are now looking to key inflation data due July 15.
The long-end in the government bond market is 'going to be pinned at these levels,' and will only come down as growth slows, according to Mr Calvin Yeoh, portfolio manager at hedge fund Blue Edge Advisors in Singapore.
He's positioned in so-called steepener trades in US Treasuries, betting that two and five-year notes will outperform 10- and 30-year notes, respectively.
'Everyone – the US, Japan, Europe – is on the fiscal bus headed to inflationville with a full tank of gas,' Mr Yeoh said.
Japan, Germany
Governments are on a path of greater issuance: Berlin abandoned decades of fiscal austerity this year to revamp its military and infrastructure; in Japan, an election struggle in the upper house is prompting pledges of spending hikes and tax cuts to woo voters.
The 30-year Japanese yield advanced more than 10 basis points, nearing the record high last seen in May. The BOJ ended its negative rate policy in 2024 and has raised borrowing costs twice since then. Officials are widely expected to keep their benchmark rate unchanged at 0.5 per cent on July 31.
Waning demand for super-long notes is also due to traditional buyers such as life insurers trimming purchases – mirroring a similar dynamic in the UK – as well as the BOJ trying to gradually back out of the market after becoming the dominant holder.
'This is a different environment than in the past,' said Barclays Securities Japan head of Japan FX and rates strategy Shinichiro Kadota. 'I think it's quite unique to this election.'
In Germany, 30-year notes fell, lifting the yield three basis points to 3.25 per cent, the highest since 2023. German Chancellor Friedrich Merz said Mr Trump's threat of 30 per cent tariffs would hit exporters in Europe's largest economy 'to the core.'
The UK and France, meanwhile, have seen borrowing costs jump as they struggle to reduce their vast debt piles.
Strategists at Morgan Stanley point out that while the share of government bonds globally has grown in proportion to all debt – including treasuries, investment grade, high yield, emerging market hard-currency and local-currency debt – they're still 'well below the 2012 peak.'
'However, in the end, investors – not models – judge debt sustainability,' the strategists wrote. BLOOMBERG