Image source: Getty Images

Japan’s bond market is making headlines again and it could have major implications for stock market investors worldwide.

Bond yields have surged to multi-year highs as the Bank of Japan (BOJ) winds down years of ultra-loose monetary policy.

Once known for rock-bottom yields, Japanese government bonds (JGBs) suddenly offer competitive returns.

As I write, here are the yields and changes (in basis points) in JGB. Rising yields indicates less demand for government debt and will mean government debt becomes more expensive to service.

Bond maturity Yield (%) Change (1 month, bp) Change (1 year, bp) 2-year 0.79 +3.4 +47.7 5-year 1.09 +7.1 +52.3 10-year 1.59 +13.9 +56.8 20-year 2.63 +24.7 +77.5 30-year 3.17 +26.2 +100.5

Why should investors care?

So, why should investors in the UK care? Because the consequences of a Japanese debt crisis could be global. And that may hit stock markets right where it hurts.

For decades, Japan’s low rates powered the ‘yen carry trade’, fuelling equity rallies abroad — including in US tech stocks — as investors borrowed cheaply in yen and ploughed the proceeds into riskier, higher-yielding assets overseas.

But as Japanese yields spike, those investors may start repatriating huge sums back to Japan as the equation shifts. That could mean dramatic outflows from global stock markets, especially in areas most exposed to foreign capital.

What’s more, Japan’s debt burden is now exceptionally high, with its debt-to-GDP ratio above 260%, the highest in the developed world (although Japanese net debt is lower).

Confidence in the stability of Japanese government bonds is being tested and that could spread to other nations with increasingly unsustainable debt… like the UK.

If a crisis of confidence erupts, that could roil not only Japan’s economy but send shockwaves through equity markets globally.

Should investors panic? No. But it’s certainly a concern. Investors with heavy holdings in markets like the US or global tech should keep a watchful eye on Japanese bond developments.

One to watch

Despite ongoing anxiety over Japan’s sovereign bond market, the country’s Mizuho Financial Group (NYSE:MFG) has performed well in 2025.

The stock is up 11.6% year-to-date and nearly 20% over the past 12 months, outpacing much of the Japanese banking sector.

Forward-looking valuation remain relatively undemanding. Mizuho trades on a price-to-earnings of 10 times in 2025, falling to 9.2 times in 2026 and 8.4 times in 2027. Interestingly, this is a bit of a premium versus British banks.

This is coupled with an attractive dividend yield. It sits at 3.59% for 2026, 3.77% for 2027, and 3.88% for 2028.

Keep one eye on U.S. bond yields

Global financial markets are enjoying a period of relative calm, with investors seemingly unperturbed by the unpredictability of U.S. President Donald Trump’s second term. The spectre of a trade war between the United States and China, which once loomed large, has, for now, receded, with optimism about deregulation and tax cuts replacing those concerns.

As stewards of capital, however, investors must look beyond current optimism to anticipate potential disruptions.

Could the bond market represent the faulty lighthouse into which equity markets crash?

The bond market appears to be signalling developments that could challenge the current tranquillity. Rising yields, a looming U.S. debt ceiling, and unconventional Treasury manoeuvres are arguably converging in ways that that warrant some attention.

The U.S. Treasury market, where 10-year yields are hovering near 4.5 per cent appears stable, but a closer examination reveals pressures that suggest yields could be higher. The U.S. Treasury’s recent actions, coupled with the Federal Reserve’s cautious stance, point to a subtle shift in monetary policy dynamics.

Some analysts argue that the Treasury is effectively assuming a role traditionally reserved for the Federal Reserve. A heavy reliance by Treasury on short-dated T-bills to finance the federal deficit has injected substantial liquidity into the financial system since early 2024.

Of course, it’s not all Treasury. The liquidity boost stems from two mechanisms. First, the Federal Reserve’s reduction of its Reverse Repo Facility (RRP) is estimated to have released approximately US$2 trillion into the system. It’s arguably Quantitative Easing (QE) without being called that.

Second, it’s estimated the Treasury has contributed an additional US$4 trillion by skewing its debt issuance toward short-dated bills rather than longer-dated bonds. The claim by some analysts is the shift is stimulatory because it reduces the “dollar duration” of the debt (a measure of interest rate risk exposure), as bills require less balance sheet capacity than bonds.

Banks, which favour these shorter-dated securities, effectively monetise the federal deficit by purchasing them, amplifying liquidity and allowing the Treasury Secretary Scott Bessent to continue ‘managing’ the rising debt levels.

Trump’s actions contradict his words

Despite President Donald Trump’s claims of reducing the U.S. federal deficit, the data tells a different story. For the first five months of the 2025 fiscal year to February (the U.S. fiscal year runs from 1 October to 30 September), the U.S. budget deficit reached a record US$1.147 trillion, with February alone showing a US$307 billion deficit, up four per cent from the previous year. This increase occurred despite efforts by the Trump administration’s Department of Government Efficiency (DOGE) to cut spending.

Trump’s tax proposals, including extending the 2017 Tax Cuts and Jobs Act (TCJA) and introducing new cuts such as zero taxes on tips or overtime pay, are projected to add significantly to the deficit. Estimates suggest these policies could increase the deficit by US$4.5-US$5.1 trillion over 10 years. While Trump has proposed spending cuts, such as a US$163 billion reduction in non-defence discretionary spending, these are dwarfed by mandatory spending (e.g., Social Security, Medicare) and interest payments, which continue to drive deficit growth.

Additionally, during Trump’s first term, the deficit grew significantly, with the national debt increasing by about US$7.8 trillion, partly due to the 2017 tax cuts and COVID-19 relief spending.

Implications

The implications of this liquidity surge are twofold. In the short term, it acts as a tailwind for global financial markets. Approximately 80 per cent of global lending is now collateral-backed, and the increased issuance of Treasury bills expands the pool of high-quality collateral, supporting lending and market activity.

You’d expect this dynamic to sustain market optimism for the time being, particularly as the Treasury’s bill-heavy issuance keeps yields on longer-dated bonds in check (keeping them from going up amid a significant supply of bonds).

The longer-term outlook, however, might be less benign because the bond market is showing signs of strain, with term premia – the additional yield investors demand for holding longer-dated bonds – trending higher.

Quite rightly, some analysts suggest this rise reflects growing investor concerns about duration risk, particularly as the Treasury’s monetisation of the deficit reduces the supply of long-dated bonds available to the private sector.

The rub

Higher term premia could eventually push yields upward, with significant adverse consequences. Rising yields depress bond prices, eroding the value of fixed-income portfolios. Simultaneously, liquidity experts suggest rising bond volatility can adversely impact global liquidity, as it influences the “haircut” applied to collateral values, which in turn affects the collateral multiplier. Higher volatility leads to larger haircuts, reducing the amount of liquidity generated through collateralised lending. This can have the effect of withdrawing liquidity from the market in the short term and potentially triggering a sell-off in risk assets like equities.

The bond market’s stability is thus a critical variable to monitor, as it could determine whether the current stock market rally continues or falters.

The Treasury’s reliance on short-dated bills also raises questions about sustainability. By prioritising bills over bonds, Treasury avoids flooding the market with long-dated securities that could drive yields higher. However, this approach effectively monetises the deficit, a process that historically invites scrutiny from “bond vigilantes”– investors who demand higher yields to compensate for perceived fiscal profligacy.

If the bond vigilante narrative gains traction, it could push 10-year yields well above the 4.5 per cent threshold that the Trump administration reportedly aims to maintain, disrupting the delicate balance of liquidity and yield management.

Complicating this picture are external factors, such as the U.S. debt ceiling, Moody’s recent downgrade of the U.S. credit rating to Aa1, and the Treasury’s planned US$50 billion in bond buybacks by early August. The debt ceiling, a perennial source of political brinkmanship, could reignite market volatility if negotiations falter. Moody’s downgrade, while not immediately disruptive, highlights nascent, if not growing, concern about the sustainability of U.S. debt levels. The buybacks, intended to manage debt maturities, could further tighten the supply of long-dated bonds, reinforcing the upward pressure on term premia.

Meanwhile, tariffs may have adopted a backing role in the current act, but they haven’t left the stage. Tariffs could still disrupt trade flows and stoke inflation, prompting a reassessment of bond yields. Fiscal policy changes, such as tax cuts or infrastructure spending, could widen the deficit, necessitating even greater debt issuance. These variables, combined with the Treasury’s liquidity manoeuvres, create a complex and potentially volatile environment.

While a surge in liquidity might justify current market optimism, the bond market might just be flashing warning signs that investors should be mindful of.

The Treasury’s bill-heavy financing strategy has provided a short-term boost, but it risks fuelling higher yields and volatility in the longer term. Rising term premia, a potential bond vigilante resurgence, and external pressures like the debt ceiling and tariffs all threaten to destabilise the market. Investors would be wise to keep a close eye on bond yields, as they may hold the key to whether the current calm persists or gives way to resurgent turbulence.

TLDR

Japan’s bond yields hit record highs as the country exits decades of deflation, threatening the profitable yen carry trade

Rising Japanese government bond yields could force investors to unwind positions funded by cheap yen borrowing

US Treasury and equity markets face potential selling pressure as Japanese money may flow back home

Nasdaq 100 paused its 30% rally from April lows as bond market turmoil creates uncertainty

Both US and Japanese bond yields are climbing, raising concerns about global market stability

Japan’s bond market is showing cracks that could shake global financial markets. The country’s 30-year government bond yields hit record highs of 3.197% this week. This marks a major shift for a nation known for ultra-low interest rates.

The Bank of Japan raised rates for the first time in 17 years in March 2024. Core inflation in Japan now exceeds levels in the US and eurozone. This forces the central bank to consider tighter monetary policy.

Japan’s bond market is imploding: Japan’s 30Y Government Bond Yield has officially surged to its highest level in history, at 3.15%. For decades, Japan was known for low long-term interest rates. Now, they are dealing with high inflation, shifting policy outlook, and a… pic.twitter.com/kZjoIurhub — The Kobeissi Letter (@KobeissiLetter) May 20, 2025

The rising yields threaten the popular yen carry trade strategy. Investors borrow cheap yen at low rates and invest in higher-yielding assets elsewhere. This trade has funded purchases of US Treasuries, stocks, and other investments for years.

Japan’s latest bond sale attracted less demand than expected. Debt sold at lower prices and higher yields than anticipated. Foreign buyers have become the main source of demand for long-term Japanese government bonds recently.

Rising Yields Shake Market Foundations

The unwinding of yen carry trades could create a “loud sucking sound” in US financial assets. Money borrowed in Japan often flows into US debt markets. A reversal could pressure both Treasury bonds and equity markets.

US bond yields are also climbing higher. The 30-year Treasury yield broke above 5.00% and approaches the October 2023 high of 5.178%. Congress is considering a tax bill that would increase the federal budget deficit.

Stock markets are feeling the pressure. The Nasdaq 100 paused its 30% rally from April lows this week. Daily momentum indicators moved from oversold to overbought levels during the recent surge.

The index created higher highs and higher lows while reclaiming moving averages. However, Wednesday’s bearish engulfing candle pattern suggests more weakness ahead. Support levels sit around 21,100 and the 20,275-20,535 range.

Market Volatility Returns

European markets reached new all-time highs along with Bitcoin during the recent rally. The Nasdaq has not yet tagged its December peak despite the strong performance. Renewed momentum could drive the index to new highs soon.

Key resistance levels include Tuesday’s low near 21,300 and the 21,500 zone above. A break higher could lead to moves toward 22,000 and the all-time high at 22,425.

The combination of rising bond yields in both countries creates uncertainty. Traders worry about another episode of yen carry trade unwinding. Last summer’s similar event disrupted global equity markets.

Japan’s exit from deflation represents a historic shift. The Bank of Japan scaled back but did not stop buying government debt. Even these moderate policy moves have clearly disrupted the status quo.

The situation bears close watching as Congress approaches the tax bill vote. Higher yields boost borrowing costs across the economy even though the Federal Reserve kept short-term rates steady.

Current data shows Japan’s 30-year bond yields reached their highest level on record at 3.197% while US 30-year yields broke above 5.00% for the first time since October 2023.

New York CNN —

In the spring of 2020, America faced a once-in-a-century health crisis that crashed the economy and threatened the lives of millions. Republicans and Democrats came together to pass a forceful, and expensive, emergency response that helped prevent permanent scarring to the economy.

Today, America’s mountain of debt is casting a shadow over Washington’s financial capability to respond to the next emergency, whatever it might be.

In a future crisis, Congress may not have as much firepower to come to the rescue because the government is already saddled with $36 trillion of debt.

The nonpartisan Congressional Budget Office estimates that President Donald Trump’s “big, beautiful bill” would pile another $3.8 trillion to that mountain of debt. That kind of extra borrowing would only amplify growing concerns about America’s unsustainable financial trajectory.

“The US is heading in the wrong direction. This bill would be one more nail in the coffin of a country falling under an enormous debt burden,” said Kristina Hooper, chief market strategist at Man Group, the world’s largest listed hedge fund.

The federal government hit a telling milestone last fiscal year: For the first time ever, interest payments on the national debt exceeded the entire defense budget. Spending on interest has more than tripled since 2017.

“There’s an argument that no great power can remain a great power if it spends more on interest than defense,” said Hooper.

While budget fights and deficit worries may seem arcane, there are real-world implications for what happens next.

First, there’s a risk that sky-high deficits will make it harder, and more expensive, for the federal government to come to the rescue in the next crisis, whether that’s a health emergency, a financial meltdown, a war or something else.

Consider that US debt-to-GDP, a closely watched gauge of a nation’s leverage, stood at around 62% before the Great Recession began in 2007. Today it stands above 120% and is on track to continue growing.

The more leveraged that investors believe the federal government to be, the more they will likely demand in compensation in the form of higher interest rates. And that has significant consequences.

Higher borrowing costs

Many Americans will feel the impact of these higher rates — including in their cost of living.

That’s because US Treasuries serve as a critical benchmark that influences the cost of other forms of credit.

The higher Treasury rates go, the more expensive it will be to get a mortgage and achieve the American dream of homeownership.

For homeowners, higher rates mean more expensive home equity loans to upgrade, repair and improve the value of their existing homes.

The same is true for people who want to take out a car loan or pay down credit card debt.

“The reason everyday Americans should care about fiscal sustainability is this is a long-running cost of living issue,” said Ernie Tedeschi, director of economics at the Budget Lab at Yale and a former economist in the Biden White House.

Higher rates will also make it more expensive for businesses to borrow money to expand and hire workers. That means fewer jobs and lower wages for Americans.

Less money for education, infrastructure

The other issue is that every $1 billion the federal government must pay on interest is $1 billion that could be going towards something most Americans care about, like education or fixing roads and bridges.

Simply put, the more the government spends on interest, the less it has to invest in more productive uses.

And, in the long run, economists say that will translate to a weaker economy and a lower standard of living.

Less wealth

Not only that, but higher rates to service America’s mountain of debt would likely weigh on the stock market. That’s in part because boring government bonds would make stocks look more expensive in comparison.

A weaker stock market makes it harder for Americans to build a nest egg for retirement, to save for their kids’ college or have a rainy day fund for a financial emergency.

Higher mortgage rates would similarly keep a lid on home values, hurting a key source of wealth for many families.

A full-blown crisis

There’s also the risk that, at some point, there would be a full-blown debt crisis in America where the debt load is so high that investors throw their hands up and say no more.

Washington got a glimpse of what that might look like earlier this year when the so-called bond vigilantes revolted over Trump’s sky-high tariff hikes, sending yields surging. Fears of a bond market catastrophe helped convince Trump to back down.

“We don’t want to live through a Greece- or Portugal-style meltdown. We’re not close to that but we don’t even want to play with that,” said Douglas Holtz-Eakin, president of the American Action Forum, a center-right policy institute.

Concerns about the fiscal situation sparked a market sell-off on Wednesday. Investors demanded higher rates on US debt in a 20-year Treasury auction. That weak auction drove down US stocks, bonds and the dollar.

Treasury rates climbed even higher on Thursday after the House passed the bill. That, in turn, drove down US stock futures.

Holtz-Eakin, an economic adviser to President George W. Bush and former director of the CBO, said Congress must act because allowing the 2017 Trump tax cuts to expire would amount to a major tax hike that would hurt the US economy.

Yet Holtz-Eakin said there is a way to do that without further adding to the deficit.

“They’re going to make things worse than current policy. This is a bad outcome,” he said.

‘Eating away at the foundation’

The White House has argued the sweeping legislation will essentially pay for itself by turbocharging growth and boosting wages.

However, the House GOP bill would only slightly boost the US economy, adding 0.5% to gross domestic product over 10 years, according to an analysis by the Penn Wharton Budget Model. And yet the package would add an estimated $3.3 trillion to federal deficits over 10 years, the analysis found.

Notably, House Republicans have not changed course even after Moody’s Ratings delivered a wake-up call last week by removing the perfect credit rating it had kept on the United States since 1917.

Of course, deficit hawks have been warning of trouble for years, if not decades.

And yet the United States has been able to run large deficits and US debt is still viewed as one of the safest assets on the planet.

There is a risk of a boy-who-cried-wolf situation where concerns about the federal budget are not heeded.

“The wolf is not at the door. The ants are in the woodwork, and they are eating at the foundation,” said Holtz-Eakin. “Every year we are cutting away from our capacity to do better because we’re borrowing so much.”

This story is available exclusively to Business Insider subscribers. Become an Insider and start reading now.

The Société Générale strategist Albert Edwards has warned that a “global financial market Armageddon” could be on the way as Japanese bond yields spike.

Long-end rates on Japanese government bonds have been rising as investors worry about inflation, government spending, and the Bank of Japan’s rate hikes. Since rates in Japan have been so low for so long, the recent surge may lead to an unwinding of the yen carry trade, where investors borrow in yen at low costs and buy assets with more robust yields abroad. If investors pull their money from those assets and invest back in Japan, it could cause problems for those markets, like the US, Edwards said.

Société Générale

“Both the US treasury and equity markets are vulnerable, having been inflated by Japanese flows of funds (as has the dollar). And, if sharply higher JGB yields entice Japanese investors to return home, the unwinding of the carry trade could cause a loud sucking sound in US financial assets,” Edwards wrote in a client note on Thursday. “Hence, I would rank trying to understand and follow the surging long end of the JGB market as the number 1 most important thing for investors at the moment.”

Related video Donald Trump’s tariffs have made the market unpredictable. Here’s what to do.

One big factor behind the surge in Japanese yields that investors should understand is that the Bank of Japan is pulling its support in the bond market and letting its holdings roll off its balance sheet. This is because inflation has proven sticky, and the central bank no longer needs to support demand.

Société Générale

With the BOJ out of the market and a vast majority of Japanese bond buyers being foreign, yields are probably set to rise further, Edwards said. That could spell trouble for US stocks. It did in July and August last year, when an unexpected rate hike from the BOJ sent the S&P 500 falling 6%.

“If like us you believe BoJ QE has been pivotal to US bubble equity valuations, then the ongoing JGB rout is a game changer,” Edwards wrote.

“I have always exhorted clients to keep a close eye on Japan,” he said. “Major financial events often happen first in Japan, for example the late-1990s tech bubble bursting first in Japan.”