Bond Market at Breaking Point as Real Rates Soar

The global bond market is at a critical juncture, with long-end yields experiencing unprecedented pressure. According to ING estimates, the 30-year Japanese yield has reached an astonishing 4.2%, four times the policy rate of 1%. This disparity is largely due to the Bank of Japan's undershot inflation dynamic, which has forced the long end to overreact.

The situation in the US is equally concerning, with the 10-year real yield hovering just below 5%. This level is likely to be a major point of resistance for the Treasury market, given the significant fiscal deficit and high inflation rate. As noted by ING, the current pressure on long-end yields is driven primarily by higher real rates, making it increasingly difficult to reverse.

The Eurozone is also feeling the heat, with eurozone yields rising in response to increased defence spending requirements and energy price shocks. The European Central Bank has already hiked interest rates, but more may be needed to address the relative value re-pricing required for long-end rates. Meanwhile, Treasury Secretary Scott Bessent's efforts to ease pressure through increased buybacks may be hampered by the complex interplay of forces driving long-end yields.