Global Bond Yields Soar as Fiscal Deficits Fuel Inflation Fears

The long-dated government bond yields have been volatile in recent years but are currently experiencing a synchronized rise across most developed markets. According to an ING analysis, the Japanese 30-year yield has reached 4.2%, four times the policy rate of 1%. This reflects a tension between the Bank of Japan's slow normalization of inflation and market expectations.

The high yen weakness prompted joint intervention by the US and Japan to calm instability. In contrast, the 10-year Treasury yield in the US is at 4.8%, with progress toward 5% considered probable. Treasury Secretary Scott Bessent has signaled discomfort with elevated yields by doubling long-end buybacks.

The root issue, however, remains the size of the fiscal deficit. The analysis notes that 5% is not particularly high historically, as it was reached in 2023. It also states that the long-run fair neutral value is around 4.5%, given current inflation of 3.5% and a fiscal deficit of 6% of GDP.

The eurozone faces cross-winds from US fiscal pressure, increased defense spending needs, and energy shocks, forcing yields upward. The European Central Bank has hiked rates and is expected to do more. Notably, the 30-year Japanese yield has moved above the 30-year German yield, with the spread widening to about 40 basis points.