Trump's Tariffs Cause 12% Bond Yield Rise in Japan

The US Treasury yield has stabilized after a five-day consecutive rise, with the market closely monitoring the likelihood of President Trump's tariff threats materializing and their potential impact on inflation and economic growth. The Federal Reserve is set to release its meeting minutes, while the White House is pressuring the Federal Reserve to cut interest rates and considering a replacement for Powell as Fed chair. Additionally, a 10-year Treasury bond auction is scheduled, following a lackluster demand for the 3-year Treasury notes auction the previous day.

The uncertainty surrounding President Trump's tariffs continues to influence global markets, with recent developments causing fluctuations in various financial instruments. Trump's announcement of a 50% tariff on imports to the US led to a surge in copper futures. This move follows Trump's decision to back off his most sweeping tariffs in April, which had prompted concerns from investors and corporate leaders. The tariff letters indicate that the tariffs remain at levels similar to those announced in April, suggesting ongoing negotiations but a persistent threat of escalating tariffs. The bond market, which had stabilized after Trump's tax bill was passed, saw yields slightly lower in the previous session. However, the overall instability in government bond markets, with interest rates fluctuating due to concerns about tariffs, economic growth, and government borrowing, continues to be a significant factor.

Trump's decision to delay his sweeping reciprocal tariffs until August 1 has bought time for trade talks but has also prolonged the uncertainty. Investors are digesting Trump's stiff tariffs on imports from more than a dozen countries and the delayed return of sweeping April levies. The economic storm that may be brewing due to these tariffs is a cause for concern, as the swift rise in yields in the week after Liberation Day threatened to make it far harder for the economy to absorb the impact of the tariffs.

The 40-year bond yield in Japan rose by 12 basis points to 3.365% amidst ongoing trade tensions with the United States. This increase comes as U.S. President Donald Trump announced a 25% tariff on Japanese goods, set to take effect on August 1. The tariff, while lower than the previously threatened 35%, remains significant and adds pressure on Tokyo to reach a trade deal with Washington. The Japanese government bond (JGB) yield curve has steepened dramatically in 2025, with long-term yields rising to 2.85% for 30-year JGBs from 1.2% in early 2024. This trend is driven by fiscal policy shifts, central bank normalization, and investor skepticism. The term premium, which is the extra yield investors demand for long-term bonds, has surged, further pressuring prices.

The yen's path remains contentious, with potential strength due to the Bank of Japan's gradual rate hikes and U.S. fiscal imbalances, but risks tied to fiscal credibility and weak JGB demand could undermine confidence. This volatility presents challenges for carry traders, who typically borrow yen (low rates) to invest in higher-yielding assets, but with JGB yields rising, the cost of funding has increased, squeezing returns. Investors are advised to monitor trade talks between the U.S. and Japan, as a resolution could ease growth fears and stabilize the yen. Additionally, equity exposure to financials and hedging against yen volatility should be prioritized.

The overall market sentiment remains cautious, with investors closely monitoring the developments in trade talks and the potential impact on various financial instruments. The uncertainty surrounding Trump's tariffs and the resulting fluctuations in bond yields and other financial markets highlight the need for vigilance and strategic planning in the face of ongoing geopolitical tensions.