A global bond market sell-off is spreading! The yield on Japan's 10-year government bonds has surged to its highest level since 1996.

The Japanese bond market reopened after a weekend holiday and was immediately caught in a global bond sell-off. The yield on Japan's 10-year government bond surged to its highest level since August 1996 on Thursday, coinciding with multi-decade highs in line with U.S. Treasury yields, signaling a historic synchronized repricing in major global bond markets.

The yield on Japan's 10-year government bond rose 10 basis points to 3.075% on Thursday, while the 5-year yield climbed 9.5 basis points to 2.37%, with yields across all maturities increasing. Meanwhile, the yield on the 10-year U.S. Treasury bond also rose to a near 19-year high, the yield on the 30-year Japanese government bond rose nearly 7 basis points to 4.134%, and the 5-year yield hit a record high of 2.345%.

This round of sell-off was driven by a combination of factors: the rebound in oil prices exacerbated inflation concerns, stronger-than-expected US economic data strengthened market expectations for continued interest rate hikes by the Federal Reserve, and weak demand in the $70 billion 5-year US Treasury auction directly pushed up yields. The Japanese bond market reopened after a three-day closure and faced concentrated pressure, with particularly sharp declines.

The sell-off of US Treasury bonds was the trigger.

The core driver of this round of global bond market turmoil comes from the United States. According to a research report by United Overseas Bank (UOB) , the combination of three factors—a rebound in oil prices, stronger-than-expected US PMI data, and weak demand in the $70 billion 5-year US Treasury auction—has pushed the 5-year US Treasury yield above 5% , leading to a rise across the entire US Treasury yield curve to a near 20-year high.

Strong economic data prompted markets to reassess the Federal Reserve's monetary policy path, further cooling investor expectations for a near-term rate cut and putting downward pressure on long-term interest rates. This trend quickly spread to major global bond markets, with the Japanese bond market bearing the brunt.

The Bank of Japan's signal of interest rate hike triggers a double shock.

The pressure on Japan's bond market is not solely from external sources. The Bank of Japan raised its benchmark interest rate last Friday and hinted at possible further monetary tightening , but traders were generally disappointed by the lack of clearer guidance on the pace of future action.

This statement put Japanese government bond yields under pressure from two sides: first, the market's expectation of further interest rate hikes by the Bank of Japan continued to rise; second, the spillover effect from the repricing of global long-term borrowing costs. The combination of these two forces resulted in a concentrated wave of selling pressure on the Japanese bond market when it reopened after the holiday.

It is worth noting that, according to Bloomberg, earlier this month, after U.S. Treasury Secretary Scott Bessent publicly expressed his expectation that Tokyo and the Bank of Japan would take action to support the weak yen, Japan's benchmark borrowing costs rose to their highest level in 30 years. This further increase means that the Japanese bond market is in the midst of its most severe interest rate rise cycle in many years.

Fiscal concerns exacerbate market anxieties.

Besides monetary policy factors, the outlook for Japanese government fiscal spending is also causing unease among investors . It is reported that the Japanese government is considering setting its medium-term defense budget target at 3.5% of GDP to align with NATO and other US allies. This news has exacerbated market concerns about Prime Minister Sanae Takaichi's overall spending plans.

Under the dual pressures of persistent inflation and expectations of fiscal expansion, investors demanded higher risk premiums for holding Japanese government bonds, further fueling this sell-off. The continued rise in yields means that the Japanese government's future debt financing costs will increase significantly, once again raising concerns about fiscal sustainability.

Analysts believe that the simultaneous sharp rise in the Japanese and US bond markets indicates that the long-term borrowing costs of major global economies are undergoing a systemic repricing.

The Japanese bond market is unique in that it has long been a key anchor for the global low-interest-rate environment. With Japanese government bond yields rising at an accelerated pace, global asset allocation strategies that rely on yen carry trades are facing pressure to reassess, and market volatility may further increase.

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