Bond Markets on Brink as Long-End Yields Reach Fever Pitch

Global bond markets are facing intense pressure as long-end yields continue to rise across many developed markets. According to ING estimates, the Japanese 30-year yield has touched 4.2%, four times the policy rate of 1%. This tension is attributed to a normalised inflation dynamic, which the Bank of Japan (BoJ) has undershot.

The BoJ's slow response has led to severe weakness in the yen, prompting joint intervention between the US and Japan to calm instability. However, if the BoJ doesn't change its stance, pressure on long-end yields will remain.

In the US, the 10-year real yield has reached 4.8%, with a target of 5% likely ahead. This is driven by higher real rates and duration-heavy issuance in the AI sector, which correlates with higher real yields.

With no countervailing force to resist these moves, and given the weight of confluences, Treasury Secretary Scott Bessent may face an uphill battle to ease pressure through increased buybacks. The risk is that bond markets may overshoot before structurally calming down.