Global markets are more connected than most people believe. And right now, markets are re-pricing sovereign risk.
The rise in global yields is no longer just a reflection of central bank policies.
From the US to Japan, to Germany, long-term government bonds are selling off fast.
This is no longer about inflation alone. Investors are demanding higher long-term yields to compensate for ballooning deficits, political volatility, and the erosion of safe-haven credibility in the US and other major economies.
The US is losing its safe-haven premium
The US 30-year Treasury yield hit 5.1% this week, the highest since before the financial crisis.
Wednesday’s 20-year bond auction struggled to find buyers.
This shows that demand is weakening, despite no clear signs of default risk or runaway inflation.
Source: CNBC
This is about trust. Moody’s downgraded US sovereign debt late last week, removing the last top-tier credit rating America held.
The timing coincided with the Trump administration’s push to pass a new tax bill that could add up to $5 trillion to the deficit.
The Congressional Budget Office projects the debt-to-GDP ratio will reach 118% by 2035.
In 2024 alone, the US ran a deficit of $1.8 trillion. Interest payments are approaching $1 trillion annually and could eat up 30% of federal revenue within a decade.
With the Federal Reserve also in a tough spot, the bond market has to adjust.
The Fed is expected to ease on growth fears but now appears constrained by tariff-induced inflation concerns.
Therefore, investors are now demanding more to lend long-term. This uncertainty feeds into demand.
This is no longer a theoretical concern; it’s showing up directly in auction results, term premiums, and currency weakness.
The dollar is falling when it should be rising
Usually, higher US yields strengthen the dollar. But since April, the opposite has happened.
The dollar has weakened, even as Treasury yields have climbed.
This signals a change in perception. Investors are adding a risk premium to US assets.
They are not fleeing en masse, but they are less confident in the long-term credibility of US fiscal policy.
This is a sign that Treasuries are no longer viewed as untouchable. When rates rise but the currency falls, something fundamental is being repriced.
A weaker dollar also reduces the attractiveness of holding US debt for foreign investors.
This further complicates financing in a world where the US needs to sell more bonds each year to cover its deficits.
Japan’s quiet crisis is no longer quiet
Japanese bond yields are also spiking, after decades of near-zero rates.
The 20-year JGB yield is now above 2.5%, while the 40-year yield touched a record 3.69%.
These are not normal moves. Japan’s long-dated bond auctions have begun to stumble, as major institutional buyers like life insurers are stepping back.
The Bank of Japan is now under pressure to slow or even reverse quantitative easing.
Even more unusual is that Japan’s yields are now higher than some European counterparts.
The yen has strengthened slightly, but not enough to explain the reversal in flows.
Investors are worried about Japan’s fiscal outlook, and they’re demanding higher returns.
This shift matters for the global market because Japanese institutions were once heavy buyers of US and European debt.
If they stay home, that adds more supply pressure elsewhere.
Europe’s pivot from austerity to rearmament
Germany’s 30-year bund yield is now above 3%, up from zero just two years ago.
That also signals something more than just inflation. It’s about fiscal expansion.
The German government suspended its constitutional debt brake in March, and new defense spending is now seen as permanent.
Across Europe, budgets are widening, and there is little appetite to reverse course.
This is a sharp break from the post-2011 era, when European bond yields were kept low through austerity.
The bond market is now re-rating this new fiscal stance.
Yields are rising not because of short-term rate hikes, but because the structural path of debt has changed.
Investors are adjusting to a Europe that will borrow more and may not offset that with strong growth.
The return of the term premium
What connects the US, Japan, and Europe is not inflation or rate hikes. It’s the return of the term premium.
Source: Bloomberg
For years, central banks dominated long-term rates through QE and forward guidance. Now, that control is slipping.
Investors want compensation for uncertainty, fiscal, geopolitical, and macroeconomic.
In 2024, the US sold $2.6 trillion in gross debt. Japan is dealing with buyer fatigue.
Germany is rebuilding its military. And everyone is spending more to hedge against global fragmentation.
Markets are not revolting yet, but they are recalibrating. Long-term capital is no longer as patient or as cheap.
This is not a temporary tantrum
The sell-off in long bonds is not just about the next Fed move. It reflects deeper changes in how markets view risk, stability, and the long-term value of sovereign debt.
Fiscal paths have steepened. Political coordination has weakened. And buyers are starting to ask harder questions.
When higher yields are driven by growth, it is usually a good sign for both fixed-income and equity markets.
But when yields are driven higher due to inflation or fiscal risk, this tends to have a negative effect on valuations.
Furthermore, the tax bill has reinforced investor skepticism that the US can grow its way out of a deepening deficit path.
It’s too quick to tell if this is a big crisis or not. But it’s certainly a big paradigm shift.
Global yields are rising for structural reasons, and the implications will stretch beyond rates.
Credit spreads, equity valuations, and currency flows are all adjusting to this new environment.
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