Global Bond Market Enters Broad-Based Selloff Amid Inflation Fears

The global bond market is experiencing a broad-based selloff, with Japan's benchmark bond yield hitting the 3% level for the first time since 1996. This milestone marks a significant shift in market dynamics, driven by inflation concerns, fiscal worries, and rate hikes.

According to Shigeto Nagai, head of Japan Economics at Oxford Economics, the rise in long-term interest rates is fueled by growing expectations of interest rate hikes and worries about fiscal sustainability in major advanced economies. He notes that concerns about long-term interest rates in major economies are fueling each other across borders.

Many analysts believe that the selloff is a result of market repricing for a higher inflation regime, a higher neutral rate, and growing confidence that the BOJ has further to go. Masaaki Lo, senior fixed income strategist at State Street Investment Management, views the 3% level as 'a normalisation story rather than a crisis story.'

Others, however, are more pessimistic about the prospects of higher interest rates. Eiji Doke, chief bond strategist at SBI Securities, warns that BOJ rate-hike expectations will put upward pressure on yields in the short- to medium-term zone, while concerns over fiscal policy will weigh particularly on the super-long sector.

The selloff is also attributed to renewed military attacks in the U.S.-Israeli conflict with Iran, which has sent Brent crude futures above $91 per barrel and fanned inflation fears. The market's attention is now shifting from monetary policy to fiscal concerns, with some analysts warning that a further rise in JGB yields could drive a repricing of global fixed income.