# Rising Japanese Bond Yields Signal Global Market Concerns

Japanese Prime Minister Shigeru Ishiba's comparison of Japan's fiscal state to that of Greece triggered alarm in the markets, reflected in one of the weakest sovereign bond auctions Japan has seen recently. This development should be a red flag for U.S. investors.

For several decades, the Bank of Japan has actively worked to keep bond yields low. However, last week's unsuccessful 20-year Japanese government bonds (JGBs) auction indicates that the period of easy money might be coming to an end. Notably, the yield on Japan's 30-year bonds surged to above 3 percent, reaching the highest level since 1999, and the 40-year bond yields hit a record high of 3.6 percent. This reduction in demand for government debt is fueled by increasing concerns about fiscal stability. In a country like Japan, where over 80 percent of bonds are held by domestic investors and the central bank, this trend is particularly worrisome.

Rising yields in Japan could prompt global investors to seek higher yields elsewhere. The U.S., with a significant part of its debt held by international entities, could face even more severe market disruptions. There are already early signs of instability, as U.S. stocks dropped following a weak 20-year Treasury auction, driving yields on 20- and 30-year notes above 5 percent. This level of cross-asset volatility is unusual and points to growing apprehension among investors about sovereign credit risks on both sides of the Pacific.

There are more reasons to be concerned. President Trump's proposed "big beautiful bill" is estimated by some to increase the U.S. deficit by $3 trillion over the next decade. The Congressional Budget Office forecasts that U.S. debt will rise to $54.4 trillion by 2034. Bonds, traditionally viewed as risk-free investments, are increasingly being seen in a new light, thanks to these fiscal uncertainties. The situation in Japan underscores that even domestic bondholders have limits to their patience and confidence.

The crucial question now is what happens if foreign investors begin to question the fiscal reliability of the U.S. Currently, Japan is the largest foreign holder of U.S. debt, holding over $1.13 trillion in Treasurys. However, if Japanese bond yields continue to rise, there could be a significant shift of capital from U.S. bonds back to Japan. Société Générale strategist Albert Edwards emphasized the potential impact of such a shift, stating, "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."

For investors, closely monitoring the developments in the Japanese bond market is now more crucial than ever.