Bond Hell Is Breaking Loose On, Or Ahead, Of Schedule

Submitted by QTR's Fringe Finance

Well, that didn’t take long.

Less than 24 hours after I wrote that soaring bond yields in the United States and Japan were one of the major reasons I thought the AI bubble could finally begin breaking later this year and into 2027, global markets woke up Tuesday morning and decided to provide a helpful visual aid.

Japan got smoked, U.S. futures moved lower, bonds sold off across the developed world, oil pushed higher, and the 30 year U.S. Treasury yield punched above 5.3%, reaching its highest level since 2007.

The Nikkei fell roughly 2.5% Tuesday as investors dumped risk assets, while Japan’s benchmark 10 year government bond yield briefly touched 2.945%, its highest level since 1996. The selloff extended further out the Japanese curve as well, with the 30 year JGB yield reaching roughly 4.1%, it’s highest level in history.

Remember, this is Japan. The country that spent decades synonymous with zero interest rates, quantitative easing and essentially free money now has a 10 year government borrowing cost approaching 3%. This is the monetary policy equivalent of a hospice home community all waking up one morning and deciding to do CrossFit, then waiting to see how their bodies respond. The answer? It’s going to be ugly.

Across the Pacific, the same thing is happening in the world’s most important bond market. The U.S. 30 year Treasury yield reached roughly 5.32%, its highest level since June 2007. The 10 year was around 4.73%, while U.S. equity futures pointed lower Tuesday morning as investors digested the global bond selloff.

As CNBC pointed out this morning, recent U.S. retail sales and labor market data have been cooling, exactly the sort of information that would normally provide some relief to bonds. Instead, long yields are going the other direction, and that is what should scare the shit out of people.

When yields rise because the economy is booming, markets can at least tell themselves a pleasant story. Earnings will rise, consumers are healthy, growth will bail everybody out and, presumably, Nvidia will eventually manufacture enough GPUs to find a cure to male pattern baldness. When long term yields rise while growth data are weakening, the story becomes much less pleasant because now you’re potentially talking about inflation, fiscal credibility, sovereign supply, foreign demand and the term premium investors require simply to lend governments money for 20 or 30 years.

Right on cue, foreign holdings of Treasuries declined in June, with Japan, China and the United Kingdom all reducing their holdings, according to Treasury data cited by the above linked report. Meanwhile oil is throwing gasoline, literally, onto the problem, creating precisely the combination bond investors don’t want to see: softer growth accompanied by persistent inflation pressure.

This is why the move might not be merely a Treasury story. It could be a global duration revolt. Japanese yields are hitting multi decade highs, American long bonds are hitting multi decade highs, European borrowing costs are moving higher and stocks are beginning to notice. The bond market appears to be telling governments around the world that the price of capital they became accustomed to is no longer available. And that’s a problem...(READ THIS FULL ARTICLE 100% FREE HERE).