Bassanett said that the sell-off in Japanese government bonds has affected the U.S. Treasury market and that he has communicated with Japanese officials.
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U.S. Treasury Secretary Bassent said that the wave of selling in Japanese government bonds has already affected the U.S. Treasury market, and he has spoken with his Japanese counterpart. This statement highlights the risk of chain reactions in global bond markets and the impact of major economies' fiscal policies on cross-border capital flows.
On Tuesday, local time, Japan’s bond market experienced what traders called “the most chaotic trading day in recent years,” with the yields of 30-year and 40-year Japanese government bonds surging more than 25 basis points—marking the biggest swing since the global market turmoil caused by the Trump administration’s announcement of “reciprocal tariffs” in April 2025.
Bassent attributed part of the decline in U.S. Treasury prices on Tuesday to the “spillover effect” from Japan’s bond market. With decades of experience as a hedge fund manager, Bassent noted that the Japanese bond market saw a “six standard deviation” magnitude of volatility.
Before the U.S. stock market opened on Tuesday (Eastern Time), the yield on the U.S. 10-year Treasury rose about 6 basis points intraday to 4.29%. During Tuesday’s European session, it rose above 4.31%, the highest level since August 2025. While attending the World Economic Forum in Davos, Switzerland, Bassent told the media: “I have been in communication with my Japanese counterpart responsible for economic affairs, and I believe they will begin to make statements that can calm the market.”
Japanese Bond Selloff Sparks Market Panic
Commentators note that the recent $7.6 trillion Japanese bond market selloff began slowly, then seemed to erupt all at once. Although concerns about Japan’s fiscal situation had been brewing for weeks, the market suddenly heated up on Tuesday afternoon with almost no warning, sending some bond yields to record highs.
The crash forced some hedge funds to hurriedly close out losing trades, prompted life insurance companies to sell bonds, and led at least one corporate bond investor to pull out of a multi-million dollar trade. Traders found it difficult to pinpoint the direct catalyst for the selloff, but the main worries were clear: Japanese Prime Minister Sanae Takaichi’s tax cuts and spending increases set off market doubts about the fiscal health of one of the world’s most indebted governments.
Masahiko Loo, Senior Fixed Income Strategist at State Street Investment Management, said: “Basically, the market is pricing in a ‘Liz Truss moment’ for Japan.”
The so-called “Liz Truss moment” refers to former UK Prime Minister Liz Truss. In October 2022, she triggered a bond market selloff by pushing untargeted tax cut plans without fiscal support, and resigned in just over forty days, making her the shortest-serving prime minister in 300 years of British constitutional history.
The Japanese government’s 20-year bond auction earlier Tuesday saw lackluster market response. Commentators see this as a troubling signal, though not making a major selloff inevitable. However, the weak auction further intensified worries about Takaichi’s tax cut plans, rapidly swinging market sentiment downward and quickly turning selling pressure self-reinforcing.
“After what seemed to be a routine 20-year bond auction quickly evolved into a crash, everyone was glued to the screen,” said Shinji Kunibe, Chief Portfolio Manager for the Global Fixed Income Group at Sumitomo Mitsui DS Asset Management Co.
Wall Street Expects BOJ May Intervene
Some investors tried to profit from the panic. Gerald Gan, Chief Investment Officer of Reed Capital Partners in Singapore, said he began buying Japanese government bonds during Tuesday afternoon’s trading after witnessing extreme volatility. He said: “The trading was just crazy. A 27-basis-point swing in yields is astonishing. The market was so out of balance, I couldn’t help but sell some US Treasuries to buy Japanese bonds.”
Vincent Chung, a portfolio manager at T. Rowe Price, also increased some underweight positions during the selloff. He said: “If you see an unbalanced move like today, you may want to cover some positions since it’s hard to know where the top is.”
But with persistent selling, Wall Street analysts say the Bank of Japan is likely to step in and intervene.
Gareth Berry, Macquarie Bank strategist based in Singapore, said that if the slump intensifies, the BOJ may intervene and purchase Japanese government bonds. “If the selloff continues, especially if it spreads globally, we should expect the BOJ to reactivate this tool, perhaps as early as tomorrow morning during daily operations.”
Tadashi Matsukawa, head of bond investment at PineBridge Investments Japan Co., likewise said that the sharp jump in Japanese bond yields may stoke calls for urgent BOJ action and Ministry of Finance buybacks.
Fiscal Expansion Plans Spark Concern
The core of this round of market turmoil lies in fears of “fiscally unsupported stimulus.” Sanae Takaichi plans to suspend the consumption tax on food and beverages, clearly aiming to consolidate support ahead of next month's snap elections. The move is expected to cost about 5 trillion yen ($31.6 billion) annually.
Takaichi said she would manage the tax suspension without issuing additional government bonds. But investors are not convinced. Some analysts expect the two-year suspension will become permanent, since raising taxes before the next election in 2028 is unlikely to be a political option.
Rinto Maruyama, a foreign exchange and rates strategist at SMBC Nikko Securities Inc., pointed out that Takaichi behaved aggressively at press briefings and rolled out consumption tax cuts without clearly identifying funding sources. He called it a “major shock,” saying the market cannot presently see how the government will fund the proposed tax cuts.
The Japanese credit bond market is also feeling the strain, with average yields on investment-grade corporate bonds jumping Tuesday, after hitting record highs the day before. Reports indicate at least one credit trader pulled out of a multi-million dollar deal as clients, concerned about soaring financing costs, requested cancellation.
Bassent Refutes Rumors of Europe Selling U.S. Treasuries
On Tuesday, Bassent also tried to downplay concerns about the impact of Trump's threat to European countries with tariffs over the Greenland issue. Previous reports suggested Europe might sell U.S. Treasuries as potential retaliation for Trump’s Greenland plan.
Bassent dismissed such speculation as a “false narrative.” At a press briefing he said: “It’s completely illogical. I strongly object to it.”
However, Danish pension fund AkademikerPension said Tuesday it plans to sell U.S. Treasuries by the end of this month, as concerns about President Trump's policies pose significant credit risks.
Anders Schelde, the fund’s Chief Investment Officer, said Tuesday: “The U.S. basically does not have good credit quality. In the long term, U.S. government finances are unsustainable.” Schelde revealed that the fund, managing about $25 billion in savings for teachers and scholars, would hold about $100 million in U.S. Treasuries through the end of 2025.
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