Global Bond Yields Surge Amid Fiscal Deficit Concerns

On Monday, long-term bond yields across Japan, Europe, and the United States surged, marking a significant shift in the global bond market. The 10-year Japanese government bond yield climbed to its highest level since 2008, while the 30-year Japanese government bond yield saw its largest increase in two months. In Germany, the 30-year government bond yield neared its highest point in 14 years. Concurrently, the 30-year U.S. Treasury yield reached 4.98%, hitting a one-month high.

This widespread increase in bond yields was driven by mounting concerns over expanding fiscal deficits. In Japan, the upcoming general election has prompted increased fiscal spending commitments, exerting upward pressure on bond yields. Similarly, in Europe, worries about fiscal deficits and potential increases in government spending have pushed bond yields higher. In the United States, the Federal Reserve's monetary policy and the prospect of higher inflation have also contributed to the rise in bond yields.

Analysts pointed out that the surge in bond yields reflects investor apprehension about the sustainability of government debt levels and the potential for higher inflation. The rise in bond yields could have broader implications for other asset classes, as higher yields make bonds more attractive relative to stocks and other investments. However, it is crucial to recognize that bond yields are just one indicator of market sentiment and should be considered alongside other economic data and market trends.

In Japan, the 20-year government bond yield reached its highest point since 2000, and the 30-year government bond yield surged by more than 10 basis points, nearing its historical high set in May. As the July 20th parliamentary election approaches, investors are focusing on national budget risks. The ruling party has proposed cash subsidies, while the opposition party plans tax cuts. Recent local media polls suggest that the ruling coalition may struggle to secure a majority, intensifying concerns.

The election pressure has led political parties to promise increased spending and tax cuts to win votes. Shinichiro Kadota, the head of Japanese foreign exchange and interest rate strategy at Barclays, noted, "This is a different environment from the past, and I think this election is quite unique." Despite the Ministry of Finance's efforts to reduce the issuance of ultra-long-term bonds, borrowing costs continue to rise. Large life insurance companies are also avoiding ultra-long-term bonds, creating a demand gap as the Bank of Japan gradually reduces its bond purchases.

In Germany, the 30-year government bond yield rose by 3 basis points to 3.25%, the highest level since 2023. Analysts attribute this increase to Germany's abandonment of its decades-long fiscal austerity policy to reform military and infrastructure spending. Additionally, the threat of a 30% tariff on exports to the United States, as announced by the , has added to the concerns.

The influence of monetary policy on the bond market is waning. Unlike short-term bonds, which closely follow interest rate paths, the surge in long-term bond yields directly reflects investor fears that global sovereign debt may be reaching a critical point. Short-term bond yields have seen relatively modest increases amid expectations of rate cuts, but the selling pressure in the long-term bond market highlights investor concerns about the fiscal health of various countries.

George Bory, the chief investment strategist at Allspring Global Investments, noted, "Government deficit spending is widespread globally, and the release valve is the long end of the yield curve." Despite recent easing of concerns over the potential increase in U.S. national debt due to the 's tax cuts, the 30-year U.S. Treasury yield has risen by more than 20 basis points this month. The 30-year U.S. Treasury yield is hovering around 5% and may break through this level again. Traders are closely watching the key inflation data to be released on Tuesday.

Calvin Yeoh, an investment portfolio manager at Blue Edge Advisors, believes that the long end of the government bond market will "remain at these levels" unless economic growth slows down. He bets that 2-year and 5-year U.S. Treasuries will outperform 10-year and 30-year U.S. Treasuries. Yeoh stated, "The United States, Japan, and Europe are all driving fiscal buses full of fuel towards the city of inflation."