Trump's threat to impose tariffs on Europe over the 'acquisition' of Greenland is triggering a chain reaction. This political turmoil has not only heightened market concerns over the U.S. fiscal outlook, weakening demand for U.S. Treasuries, but also resonated with the bond market volatility triggered by Japan's domestic tax cut plan.
U.S. Treasury bonds joined the global bond sell-off as threats to impose additional tariffs over the Greenland issue weakened demand for American assets and heightened concerns about Washington's long-term fiscal health.
Yields on 10-year and 30-year U.S. Treasury bonds climbed at least 3 basis points during Asian trading hours on Tuesday, following a U.S. market holiday on Monday. President Trump’s plan to impose taxes on some European nations in pursuit of acquiring Greenland once again raised questions about the unpredictability of his administration’s policies.
Japanese government bonds also declined, with the yield on 40-year JGBs rising to 4%. Following a surge in long-term yields to multi-year highs after the government announced tax relief on food products, traders are now awaiting the auction of Japan’s 20-year bonds. Australian and New Zealand bonds also fell, while German bond futures similarly declined.
“The long end of the global sovereign bond curve appears vulnerable,” said Andrew Ticehurst, senior rates strategist at Nomura Australia Ltd. in Sydney. He cited ongoing uncertainty surrounding threats to the Federal Reserve's independence, growing speculation that Rick Rieder could become the next Fed chair, and the possibility that the Supreme Court may rule some of Trump’s tariffs illegal, all of which could exacerbate concerns about the fiscal outlook.
European countries hold substantial amounts of U.S. Treasuries and equities, with portions managed by public sector funds. This has fueled market speculation that they might sell their holdings of U.S. assets in response to Trump’s renewed tariff war. Given America’s reliance on foreign capital, such a move could raise borrowing costs and depress stock markets.
“As Europe and the U.S. face off over Greenland, it is natural for traders to seek safer assets. In any normal market, this would mean the dollar and Treasuries, but we are not in normal times,” said Sebastian Boyd, a strategist at Bloomberg Live Markets.
Adding to the pressure on U.S. Treasuries is growing concern that Japanese investors may sell their holdings to repatriate funds amid a rebound in domestic yields, a trend that could further push up U.S. Treasury yields.
“My primary concern is that Japanese government bond yields have reached levels where investing in U.S. Treasuries, on a hedged basis, is no longer attractive,” wrote Ronald Temple, chief market strategist at Lazard Asset Management, in a report. “If Japanese yields continue to rise, the rational choice for Japanese investors may be to shift funds back home to earn higher yields than what can be achieved from the U.S. or Europe after hedging currency costs.”
Japan’s 40-year government bond yield hit 4% for the first time since its introduction in 2007.
The yield on Japan’s 40-year government bonds touched 4%, marking the highest level since the issuance of this bond type in 2007 and representing the first time in more than three decades that any Japanese sovereign bond maturity reached this level.
Due to growing unease in the market over Masanao Takai's plan to cut food sales taxes, the yield on Japan's 40-year government bonds once surged by as much as 6 basis points, marking the first time since 1995 that Japanese bond yields reached 4%. On Tuesday, the yield on 20-year Japanese government bonds climbed by as much as 9.5 basis points to 3.35%.
"The Japanese bond market is currently in a state with no buyers and continuous selling," said Takashi Fujiwara, chief fund manager at Resona Asset Management. "However, as the food tax cut is absorbed by the market, the decline should stop at some point before the election."
Investors have been dumping Japanese government bonds amid speculation that the party led by Masanao Takai will win more seats and consolidate its power, giving her greater freedom to intensify stimulus measures. In a press conference on Monday, she officially announced that the general election would be held on February 8.
The surge in yields marks a turning point for the Japanese bond market, where years of ultra-low interest rates kept Japanese government bond yields far below those of global peers. The yield on Japan's 30-year government bonds has surpassed Germany’s equivalent maturity bonds, which are around 3.5%.
Data from the Japan Securities Dealers Association shows that local insurance companies sold a record 822.4 billion yen (approximately $52.1 billion) worth of bonds with original maturities exceeding 10 years in December last year. This represents the largest net sell-off since Bloomberg began compiling this data in 2004, adding further pressure to an already bearish bond market sentiment.
The newly established political party 'Centrist Reform United,' formed through the merger of Japan’s largest opposition party and former coalition partners, also aims to manage a new government-related fund to raise funds required for cutting food sales tax to 0%. While Masanao Takai's high approval ratings lead some investors to expect an easy victory, the formation of 'Centrist Reform United' adds risk to this electoral contest.
Investors were cautious ahead of Tuesday’s auction of 20-year Japanese government bonds. The results of this auction will serve as a test to determine whether the recent rise in yields is sufficient to offset concerns that worsening government finances will harm bonds.
"The possibility of a consumption tax cut has increased significantly, making it difficult to see investors buying at this stage," said Ataru Okumura, senior interest rate strategist at SMBC Nikko Securities. "The outcome of the 20-year Japanese government bond auction is highly uncertain, and we cannot feel reassured about it."
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