Japan's benchmark 10-year bond yield struck the closely watched 3% level for the first time since 1996 on Tuesday, as a deepening global debt selloff intensified on trader concerns over oil-driven inflation, monetary tightening and worsening fiscal conditions, Reuters reported.
With the Middle East crisis stoking price pressures worldwide, yields have climbed from Tokyo and Sydney to New York and London as investors position for central banks to raise interest rates further.
A market under pressure from multiple directions
The bond market is also being squeezed by a wave of new issuance as hyperscalers raise money aggressively to fund the artificial intelligence boom, at a time when US government debt has surpassed $40 trillion and Japan's ministries are expected to request a record initial budget for the next fiscal year, according to Reuters. Bond yields rise as prices fall, and the scale of new supply competing for investor capital has added to the pressure.
The sharp rise in yields creates a dilemma for policymakers at a moment when markets have become highly sensitive to any sign of fiscal profligacy. For Japan, it raises the cost of servicing the developed world's largest debt pile just as Prime Minister Sanae Takaichi plans an aggressive investment agenda.
Masahiko Loo, senior fixed income strategist at State Street Investment Management in Tokyo, said investors are demanding greater compensation to hold long-dated debt as government and corporate funding needs compete for the same pool of capital, adding that bond investors are now "increasingly focused on inflation and supply" rather than growth.
Yields climb across markets
Japan's 10-year government bond yield reached 3% for the first time since September 1996, while the five-year rate hit a record 2.26% and the two-year yield touched a 31-year high of 1.795%. US 10-year Treasury yields also rose to their highest level since January of last year, reaching 4.786% during Tokyo trading hours.
Australian 10-year yields recorded their sharpest rise in five months, which traders partly attributed to sensitivity around Japanese demand amid speculation that higher domestic yields could reduce Japanese purchases of Australian debt. European yields climbed too, with Germany's 10-year yield, the eurozone benchmark, reaching 3.34%, its highest level since 2011.
A "regime change" for Japanese debt
The rise in Japan's 10-year yield to a fresh three-decade high is seen as a psychologically significant threshold, one that could prompt investors to reconsider how they view Japanese government debt, long regarded as a stable global benchmark.
Prashant Newnaha, senior rates strategist at TD Securities in Singapore, said a further rise in Japanese government bond yields would make carry trades less attractive and could drive a gradual reallocation into Japanese assets, describing the shift as "a genuine regime change" after JGBs served as an anchor for global fixed income for years.
Traders have solidified bets that the Bank of Japan will raise rates at its meeting this month, with policymakers sounding increasingly hawkish in recent weeks. US Treasury Secretary Scott Bessent has added to the pressure by urging Japan's central bank to tighten policy. The US Federal Reserve also appears primed for near-term tightening after chair Kevin Warsh struck a hawkish tone at the annual Jackson Hole symposium.
Andrew Lilley, chief rates strategist at Barrenjoey in Sydney, said the broader selloff in global yields largely reflects a reassessment of Fed policy, with markets increasingly concerned that central banks may already be behind the curve on tightening. He warned against a scenario in which a central bank fails to deliver tightening and the market imposes it instead, since that suggests investors believe the bank "is running a big risk."
Source: Reuters
