Frequent Warnings from U.S. and Japanese Bond Markets: U.S. “Big and Beautiful Act” Intensifies Fiscal Deficits and Debt Pressure, Japan’s Long-term Bond Auction Weakens, Triggering Huge Potential Losses for Financial Institutions, with Global Fiscal Sustainability and Interest Rate Risks Drawing Heightened Market Attention.
(Background: Japanese Bond Crash? 40-Year Yield “Breaks 3.6%” to Create 18-Year High, Experts Warn: Perfect Storm Approaches)
(Background Supplement: U.S. Stock Market Plummets; Rich Dad Says “I Told You So”: Buy Bitcoin, Gold, and Silver for Safety)
The bond markets of the two major economies, the United States and Japan, have recently sounded alarms simultaneously, highlighting the significant rise in global fiscal sustainability and interest rate risks. This trend may have profound implications for the economic landscape and investment strategies in the coming years.
U.S. Fiscal Alarm Deteriorates and Bond Market Faces Significant Pressure
The “Big and Beautiful Act,” strongly pushed by U.S. President Trump, is expected to increase national debt by an additional $3.8 trillion over the next decade. The act, humorously dubbed the “BBB Act,” closely resembles the rating of junk bonds, ironically reflecting the dangerous turn in fiscal policy.
The Congressional Budget Office (CBO) estimates that the debt-to-GDP ratio will rise from the current 98% to 125%. As the yield on 10-year U.S. Treasury bonds breaks above 4.5% and the 30-year yield briefly surpasses 5%, the pressure for debt repayment is expected to increase sharply.
Although the U.S. Treasury insists it has measures in place to reduce debt and points out that foreign holdings of U.S. Treasury bonds increased by 12% year-on-year to $9 trillion as of March (before the announcement of new tariffs), multiple warning signs have already emerged in the market:
- Long-term bond yields have risen despite weakening economic data.
- The “term premium” on U.S. bonds continues to rise, highlighting fiscal risks.
- Foreign demand for U.S. bonds is weakening.
- Liquidity in the Treasury cash market is declining.
Japan’s Bond Storm Intensifies
Meanwhile, across the Pacific in Japan, the results of the 20-year government bond (JGB) auction held on May 20 were unusually bleak. The bid-to-cover ratio was only 2.5 times, a new low since 2012, indicating extreme caution in the market regarding demand for long-term bonds.
Following the auction results, long-term bond prices in the secondary market plummeted. According to Bloomberg data, the yield on Japan’s 20-year government bond briefly soared to 2.6%, marking the highest level since 2000. This poses a severe floating loss risk for institutions holding substantial amounts of Japanese long bonds, such as pensions, insurance companies (Japan’s largest life insurer, Nippon Life, revealed a book loss on its domestic bonds of 3.6 trillion yen, approximately NT$756 billion), banks (such as Norinchukin Bank), and international hedge funds.
Some institutions have already indicated they will shift towards low-risk assets or reduce their holdings in government bonds. The market is increasingly concerned that a wave of redemptions could force institutions to sell bonds, turning floating losses into realized losses, reminiscent of the 2023 bankruptcy case of Silicon Valley Bank (SVB).
Investment Insights from the Global Bond Market Changes
The alerts from the U.S. and Japanese bond markets carry significant implications for the global financial market. Adam, Chief Investment Officer at Raymond James, is closely monitoring whether the yield on the 10-year U.S. Treasury bond breaks above 4.5%. He points out that this level could mean mortgage rates might rise to 7%, placing pressure on the housing market and the overall economy, which would also negatively impact the price-to-earnings ratio of the S&P 500 index. If yields rise further to 4.75%, the outlook for U.S. stocks will be even less optimistic. He warns investors to be vigilant about bond market signals and consider diversifying investments or reducing positions in cyclical stocks.
Trump’s “Big and Beautiful Act” and Japan’s weak bond auction together reveal the severe challenges major economies face in maintaining fiscal discipline, ringing alarm bells for governments worldwide and reminding investors to exercise greater caution in turbulent markets and consider diversified investment strategies to mitigate risks.
