Japan borrowing costs hit record levels
A sharp rise in Japan’s borrowing costs sent shockwaves through global bond markets on Tuesday, highlighting growing investor sensitivity to fiscal pressures and heavy government debt.
Japan’s 10-year government bond yield jumped nearly 19 basis points over two days, the steepest rise since 2022. Meanwhile, 30-year yields recorded their largest daily increase since 2003 as markets priced in the prospect of higher government spending.
Prime Minister Sanae Takaichi called a snap election and is campaigning on a stimulus-focused platform, raising concerns that fiscal expansion could accelerate.
“If there is a strong mandate following the election, that could open the door to more fiscal spending,” said Seema Shah, chief global strategist at Principal Asset Management.
Greenland tensions add pressure to bond markets
Bond investors were also digesting renewed geopolitical stress linked to U.S. President Donald Trump’s tariff threats against European allies over Greenland. Analysts warned that escalating tensions could force Europe to increase defence spending, leading to additional bond issuance.
Fears of a renewed “Sell America” trade resurfaced, putting pressure on U.S. Treasuries. The benchmark 10-year U.S. yield climbed to 4.313%, its highest level since late August.
Danish pension fund AkademikerPension announced plans to sell roughly $100 million in U.S. Treasury holdings by the end of the month, adding to selling pressure.
U.S. and European yields follow Japan higher
U.S. 30-year Treasury yields rose about 8 basis points to 4.91% as markets reopened after Monday’s holiday. Over two days, yields climbed 13 basis points, marking the largest increase since May during a flare-up in U.S.-China trade tensions.
The spread between U.S. two-year and 30-year yields widened sharply, signaling rising investor concern over long-term fiscal sustainability, even as it remained below the extremes seen during last year’s market turmoil.
“Japanese fiscal pressures are concerning, but markets have become more tolerant of U.S. deficits,” wrote Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.
Europe feels the spillover
German 30-year bond yields briefly climbed to 3.53%, their highest level in two weeks, while U.K. 30-year yields rose to 5.22%, their largest daily jump since early January.
Analysts noted that Greenland-related tensions reinforce expectations of higher European defence spending and increased debt issuance.
“It again means that Europe needs to do more on defence,” said Barclays euro rates strategist Rohan Khanna. “That eventually means more issuance and weaker long-end bonds.”
Global investors reassess risk
European markets were also sensitive to the Japanese bond selloff because Japanese investors are among the largest buyers of foreign debt. Higher domestic yields could prompt capital to flow back into Japan.
“The question is whether those flows come out of the U.S. or Europe,” said ING rates strategist Michiel Tukker. “Given the geopolitical backdrop, spillovers to U.S. Treasuries could be stronger.”
