U.S. and Japanese bonds lead the decline! Tariff concerns and fiscal pressures trigger global bond market sell-off.

The global bond market experienced a large-scale sell-off, with yields on U.S. 10-year and 30-year Treasury bonds rising by at least 4 basis points, Japanese 10-year bond yields up by 8 basis points; concerns about fiscal spending, a new round of tariff threats, and doubts over the safe-haven status of U.S. Treasuries jointly triggered market volatility.

President Trump plans to levy tariffs on certain European countries to advance his plan to acquire Greenland, reigniting market concerns over the unpredictability of government policies. This move could exacerbate inflationary pressures and spark further worries about widening fiscal deficits.

The sell-off has spread to major bond markets around the world. Japanese 40-year bond yields briefly rose to 4%, the highest since the product was introduced in 2007; Australian and New Zealand bonds also fell simultaneously; German bond futures saw declines as well.

Multiple concerns are fermenting in the market: the ballooning U.S. fiscal deficit weakening the safe-haven appeal of Treasuries, European countries possibly selling trillions of dollars in U.S. Treasuries in response to the tariff war, and Japanese investors potentially withdrawing capital due to rising domestic yields. These factors together are shaking the foundation of the world’s largest bond market.

Tariff Threats Reignite Policy Uncertainty

According to Xinhua News Agency, U.S. President Trump announced on social media on the 17th that, starting February 1st, the U.S. will impose an additional 10% tariff on goods imported from Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands, and Finland. He stated the tariff rate would rise to 25% from June 1st until the relevant parties reach an agreement on the U.S.'s "comprehensive and complete acquisition of Greenland."

The Trump administration’s latest tariff threat has become the catalyst for this round of bond market sell-off. Plans to impose tariffs on some European countries as part of the Greenland acquisition strategy have caused the market to reassess policy unpredictability.

Andrew Ticehurst, Senior Rates Strategist at Nomura Australia, said, "The long end of the global sovereign bond curve feels very fragile." He pointed out that persistent uncertainty around Fed independence, growing speculation that Wall Street trader Rick Rieder may become the next Fed chair, and the Supreme Court possibly issuing unfavorable rulings on some Trump tariff policies are all intensifying concerns about the budget situation.

Repetitive tariff policies could worsen price pressures and further stoke fears of fiscal disorder. After posting the largest annual gain since 2020, the global bond market is off to a poor start this year, as investors demand higher yields to compensate for persistent inflation and steadily increasing government borrowing.

The Safe-Haven Status of U.S. Treasuries Faces Challenges

U.S. Treasuries are losing some of their safe-haven appeal, as a ballooning fiscal deficit and geopolitical tensions sap market confidence, and investors question whether the world’s largest bond market can still provide reliable protection during times of deteriorating risk sentiment.

European countries hold trillions of dollars in U.S. bonds and stocks, some by public sector funds. There is speculation in the market that these countries may sell positions to respond to Trump’s renewed tariff war; given the U.S.’s dependence on foreign capital, this could raise borrowing costs and drag down the stock market.

According to Bloomberg’s strategy team, "The breakdown of globalization appears to be accelerating, highlighting concerns over ramped-up debt issuance to fund defense, welfare, and energy infrastructure spending. In an era where central banks appear reluctant to cut cash rates further, government securities are no longer seen as providing a haven from geopolitical storms."

Risks of Japanese Investors Pulling Out Emerge

Rising domestic yields in Japan are fueling another major concern: Japanese investors may sell U.S. Treasuries and repatriate funds, a trend that could further push up U.S. Treasury yields.

Demand for Japan’s 20-year government bond auction was weaker than the 12-month average, heightening caution. Yields on 40-year Japanese government bonds rose to 4%, a record high since their introduction, eroding the appeal of investing in U.S. Treasuries once currency hedging costs are factored in.

Ronald Temple, Chief Market Strategist at Lazard Asset Management, wrote in a report, "My main concern is that Japanese government bond yields have reached a level where investing in U.S. Treasuries on a currency-hedged basis loses its appeal. If Japanese government bond yields continue to rise, Japanese investors’ rational choice may be to channel capital back to Japan, securing returns net of currency-hedging costs that exceed those in the U.S. or Europe."

This capital flow trend could pose structural pressure on the U.S. Treasury market: with the U.S. reliant on foreign capital to finance deficits, a pullout by Japanese investors will exacerbate market volatility.

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