Japan’s long-term yield hits all-time high as debt crisis fears explode

Yields on Japan’s longest government bonds surged to their highest levels ever recorded on Tuesday, rattling markets and raising fresh alarms about the country’s worsening fiscal health.

The spike came after an underwhelming debt auction showed major cracks in investor confidence. According to the Financial Times, the 30-year bond yield jumped to 3.14%, and the 40-year yield climbed to 3.61%, both increasing by 0.17 percentage points in a single session.

The 20-year bond didn’t hold up either, spiking by 15 basis points to hit 2.56%. The auction’s tail–the difference between the highest and lowest accepted prices–was the widest seen since the 1980s.

BoJ taper triggers panic as traders warn of global fallout

The Bank of Japan has spent the past year slowly reducing its presence in the bond market, trying to pull away from its long-standing ultra-loose policy. That plan is now under fire. Traders said Tuesday’s chaos was directly tied to this tapering, which has been causing volatility across the entire yield curve.

Mike Riddell, fund manager at Fidelity Investments, warned that the surge in yields could cause “contagion and further weakness in the long end of global bond markets” if Japanese investors start moving money back home.

Japan holds massive amounts of overseas assets, and any sign that it’s pulling capital out could slam other markets hard. The Ministry of Finance is now being dragged into the mess.

Just minutes after Tuesday’s auction, the central bank published feedback it had gathered from market participants about how tapering has gone. Several banks and brokers told the BoJ to reconsider, especially when it comes to long-dated bonds.

The numbers are brutal. Société Générale estimates that the private sector will have to take on ¥60 trillion in new debt before the fiscal year wraps up in March 2026. That’s a massive load. And there’s no clear answer on who’s going to buy.

Life insurance firms, who’ve long been major players in the long-end market, are now changing their strategy and pulling back from that part of the curve. This creates a major hole in domestic demand that the market hasn’t figured out how to fill.

Political crisis deepens as Ishiba loses grip on leadership

On top of the financial stress, the government itself is looking shaky. Prime Minister Shigeru Ishiba is facing rising doubts from within his own coalition. His approval ratings are low, and analysts say his political base is too weak to weather much more turbulence.

Ishiba also hasn’t managed to lock in any agreement with US President Donald Trump on tariffs, leaving Japan’s trade position vulnerable.

With upper house elections scheduled for July, there are growing expectations that Ishiba might turn to tax cut promises to shore up his support. That move, analysts warn, could further destabilize Japan’s budget, especially as it wrestles with a public debt load already more than 200% of GDP.

And while this bond chaos may seem isolated to Japan, the effects aren’t. The last time the yen carry trade came under pressure, on August 8, 2024, global equity markets dropped.

That’s when investors unwind a trade where they borrow yen at low interest rates and invest in higher-yielding currencies like the US dollar. When yields in Japan climb, that trade becomes risky, and it forces big players to pull capital out of riskier assets worldwide.

For now, the risk of a repeat crash isn’t high, but it’s not zero either. US interest rates are still higher than those in Japan, which keeps the carry trade attractive for now. But that gap is narrowing.

Current market pricing shows a 94.7% chance the Federal Reserve will hold rates between 425–450 basis points next month. That drops to 71.2% for the July 30 meeting. By September, there’s a 53.1% probability that rates fall to 400–425 bps.

If that happens and Japan’s yields stay where they are or climb even more, the carry trade could unravel again. The money would flow back into Tokyo, draining liquidity from global markets and dragging down everything from US stocks to emerging-market debt. After what happened Tuesday, no one has dismissed that scenario. Not anymore.

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