Japan leads global long-bond drop as spending takes centre stage

Yields on long-term debt, from Japan and Germany to Britain and France, rose on July 14 as growing concern over widening fiscal deficits dented demand.

The yield on Japan’s 30-year notes jumped the most in two months, and those on similar-maturity German bonds flirted with their loftiest levels in 14 years. For these countries, fiscal concerns are usurping central bank interest rate policies as the main factor to watch.

While the sell-off is less pronounced in the US, 30-year yields there still touched their highest in a month.

Japanese election largesse and US President Donald Trump’s weekend tariff announcements were the immediate cause of the latest nudge higher. They tapped into deeper concerns about excessive government debt, fire hose spending, too many bonds coming to market, and inflation that is still much too sticky in developed markets around the world.

“Monetary policy has taken a backseat as primary policy focus, to be replaced by what is happening with budgets and national debts,” said Mr Benoit Anne, senior managing director and head of the market insights group of MFS Investment Management.

That is all well and good if investors are willing to finance it, Mr Anne said, but past episodes have shown that investors can quickly develop “an acute case of fiscal profligacy scepticism”.

While shorter-maturity yields track the path of interest rates more closely – and are posting smaller moves on the expectation of cuts – a loss of appetite at the long end of the yield curve is a more direct reflection of the fear that growing piles of sovereign debt around the world could ultimately reach a tipping point.

In the US, the rate on 30-year debt was up three basis points to 4.98 per cent as at 11am in New York and has now risen more than 20 basis points since the start of July. 

“The 30-year Treasury is right around 5 per cent and likely breaks back up,” said Mr George Bory, chief investment strategist for the fixed income team at Allspring Global Investments, on Bloomberg Radio on July 14. “The reality is that deficit spending by governments is very prevalent around the world, and the relief valve is the long end of the curve.”

Investors remain uneasy over the prospect that Mr Trump’s One Big Beautiful Bill Act will add trillions to the national debt pile over the coming decade. 

Still, those concerns have eased in recent weeks, and the nation’s 30-year debt has performed better than most developed nation peers in the year to date, despite dizzying swings. Traders are now looking to key inflation data due on July 15.

The long end in the government bond market is “going to be pinned at these levels”, and will only come down as growth slows, according to Mr Calvin Yeoh, portfolio manager at hedge fund Blue Edge Advisors in Singapore.

He is positioned in so-called steepener trades in US Treasuries, betting that two- and five-year notes will outperform 10- and 30-year notes, respectively. 

“Everyone – the US, Japan, Europe – is on the fiscal bus headed to inflationville with a full tank of gas,” Mr Yeoh said.

Japan, Germany

Governments are on a path of greater issuance. Berlin abandoned decades of fiscal austerity in 2025 to revamp its military and infrastructure. In Japan, an election struggle in the Upper House is prompting pledges of spending hikes and tax cuts to woo voters. 

The 30-year Japanese yield has advanced more than 10 basis points, nearing the record high last seen in May. The Bank of Japan (BOJ) ended its negative rate policy in 2024 and has raised borrowing costs twice since then. Officials are widely expected to keep their benchmark rate unchanged at 0.5 per cent on July 31.  

Waning demand for super-long notes is also due to traditional buyers, such as life insurers, trimming purchases – mirroring a similar dynamic in Britain – as well as the BOJ trying to gradually back out of the market after becoming the dominant holder.

“This is a different environment than in the past,” said Mr Shinichiro Kadota, head of Japan foreign exchange and rates strategy at Barclays Securities Japan. “I think it’s quite unique to this election.” 

In Germany, 30-year notes fell, lifting the yield three basis points to 3.25 per cent, the highest since 2023. German Chancellor Friedrich Merz said Mr Trump’s threat of 30 per cent tariffs would hit exporters in Europe’s largest economy “to the core”.

Britain and France, meanwhile, have seen borrowing costs jump as they struggle to reduce their vast debt piles.

Strategists at Morgan Stanley point out that while the share of government bonds globally has grown in proportion to all debt, including Treasuries, investment-grade, high-yield, emerging market hard currency and local currency debt, they are still “well below the 2012 peak”.  

“However, in the end, investors – not models – judge debt sustainability,” the strategists wrote. BLOOMBERG