Traders flee Japanese bonds ahead of election and global spending wave

Japanese bonds just got slammed again, and this time the numbers are too loud to ignore. On Monday, long-term government bonds in Japan dropped hard, with yields now brushing up against all-time highs.

According to Bloomberg, investors pulled out sharply as political risk and fiscal uncertainty took center stage ahead of the July 20 upper house election. Traders are dumping super-long bonds fast, and nobody’s stepping in to catch them.

The 30-year yield jumped 12.5 basis points to 3.165%, just short of the 3.185% record from May. The 20-year yield surged 12 basis points to 2.620%, hitting a level that hasn’t been seen since the year 2000.

The 40-year yield climbed the most—17 basis points to hit 3.495%. Even the shorter 10-year bond wasn’t safe, rising 7 basis points to 1.57%. This is happening days before the election, and investors are already backing away fast.

Traders flee Japanese bonds ahead of election and global spending wave

The pressure is coming from two sides. First, there’s Japan’s upper house election on July 20, where local polls are hinting that the ruling bloc could lose its majority.

Politicians have been trying to win votes with pledges of more spending and tax cuts, but markets see that as a growing threat to Japan’s already massive debt. The government is about to lean deeper into fiscal expansion, and bondholders want no part of that.

“There is a move to reduce risk ahead of the upper house election in the bond market,” said Miki Den, a senior rates strategist at SMBC Nikko Securities. “With few buyers expected before the election and ongoing selling flows, super-long-term bonds are experiencing large price fluctuations and are being sold off.”

But it’s not just Japan. On the same day, Germany’s 30-year bond yield rose 3 basis points to 3.25%, its highest level since 2023. If it climbs past 3.263%, that would be the strongest it’s been since 2011. The reason is almost identical; governments throwing more spending onto the table, and investors responding by bailing out of long-dated debt.

In Germany’s case, the market reacted to President Donald Trump’s announcement of a 30% tariff on European Union goods, which came just before the EU’s sale of bonds maturing in 2054. That sent traders into defensive mode, driving up yields across Europe. Everyone is scared of holding the bag on long-term paper when inflation, debt, and political risk are all rising.

Germany had already passed a huge spending package back in March. That plan unlocked hundreds of billions of euros for military and infrastructure projects.

But now, the borrowing plan is getting even bigger. Last month, Germany’s finance agency confirmed it will borrow about 20% more than planned over the next few months to keep funding that wave of spending. Investors clearly don’t like it.

Now apply that logic to Japan. The country’s fiscal situation is already fragile. Add in election promises for more tax breaks and spending, and the bond market has every reason to bail.

The current selloff doesn’t look like a temporary blip—it looks like a warning. Traders don’t want to be stuck holding debt that could spiral if political control shifts or if spending ramps up even more.

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