Why are Bond Yields RISING FAST Everywhere?

Why are Bond Yields RISING FAST Everywhere?

for decades Japan had artificially low interest rates but since 2022 bond yields have risen and the pace of increase is getting much steeper and when you have debt of over 270% of GDP this is a big deal japan has a double crisis rising debt and a collapse in the working age population with inflation going up and the economy going into recession it’s no surprise that markets have become reluctant to take on long-term Japanese debt but Japan is not the only country facing rising government debt government debt has been rising around the world from 40% of GDP in 1973 to 110% today the world’s largest economy the United States is having its own bond market meltdown a worrying combination of surging debt a falling dollar and markets losing confidence in the United States for years we lived in a world where there was basically zero risk premium for US debt but that is changing and nearly every advanced country has seen higher bond yields in the past 30 days so what happens next adam Dus who wrote a definitive history of the 2008 financial crisis argues this scenario is more serious than 2008 for decades Japan had a problem with deflation they tried monetary stimulus fiscal stimulus but nothing really worked but recently inflation has finally returned but there’s no celebration because it ended up with more inflation than they wanted and an unexpected shrinking of the economy when inflation is close to zero markets are relatively happy with low bond yields but as inflation rises investors demand higher bond yields otherwise inflation reduces the real value of your bond the other reason is the Bank of Japan is reversing quantities of easing in the 2000s the government created huge quantities of money to buy its own debt in fact the government of Japan owns over 52% of its own debt but the Bank of Japan is now struggling to sell this back onto the market markets are concerned about inflation low growth and demographic change now does it actually matter if bond yields rise well firstly if bond yields rise the government need to pay more debt interest payments secondly when bond yields rise sharply it means that holders of bonds see a fall in the value of their assets a rise in a 40-year bond yield from 1 to 4% means that someone who bought a Japanese 40-year bond in 2022 could lose 69% of their value remember when UK bond yields soared in September 2022 pension funds went into meltdown because they never expected such quick losses in the value of their bonds in fact that trust era is a cautionary tale of the power of a bond market to bring down a government or at least change economic policy but before we get carried away with the idea that the Japanese bond market is in meltdown there are a few points uh worth mentioning firstly the Japanese government has gross liabilities of 270% of GDP but they also have government assets of 192% of GDP so net public liabilities are only around 78% of GDP secondly Japan could end quantitive tightening and if necessary go back to money creation as any good modern monetary theorist would tell you if you borrow in your own currency you can’t go ill liquid because you can always create as much money as you need to buy your own government debt however whilst that was an easy gig in the deflation period of the past two decades now that inflation has returned a big increase in the money supply is more problematic and the Bank of Japan won’t want to embark on a massive monetary stimulus with inflation above target thirdly and quite interestingly Japanese government have put huge quantities into the US bond market in fact Japan are the largest holders of US bonds with 1.1 trillion as of March 2025 so Japan and all all its government related agencies could always sell all these US treasuries and bring the money back to buy Japanese bonds but of course with Trump threatening a trade war with Japan a massive Japanese sale of US bonds which will push up US bond yields even more may not go down very well it will make it more difficult to get a trade deal that the exporting economy needs but that brings us on to the US bond market which is arguably a much bigger problem now Japan is not alone in selling US treasuries china and other countries have been quietly offloading US bonds for quite a few years the US really has relied on foreigners to buy it debt and of course this has helped reduce the cost of servicing debt but the share of foreign holdings has fallen from 42% to 30% and since the start of this year with all the tariff turmoil foreign selling of US bonds has continued and this is a factor behind pushing up US bond yield now the rise in US bond yields is a bit different to Japan it’s not really because inflation has suddenly reappeared it’s more because of the uncertainty around the US economy and in particular a ballooning budget deficit moody recently downgraded US debt on the grounds the budget deficit will rise to 9% of GDP by 2030 now that’s really unprecedented for peace time and it excludes no crisis which may well come along and for the first time in generations there’s a genuine uncertainty about the reliability of US bonds and the danger is that as US bonds rise it creates a vicious cycle as bond yields rise the government has to spend more on debt interest payments this causes higher debt causing bond yields to rise even more us debt interest payments totaled 881 billion in 2024 more than Medicaid or national defense and debt interest payments could take 22% of tax revenue by 2035 and also there isn’t an additional complication for the United States the dollar has been sliding since the start of the year and is widely expected to continue to slide and the devaluation of the dollar may in the long term help US exports but in the short term it means that foreign holders of US bonds will lose out even more and this will only encourage them to sell US bonds causing even more rises in bond yields which again kind of puts downward pressure on the dollar everything’s interlin not necessarily in a good way now when bond yields rise very rapidly it can give the government a really unwelcome difficult choice you may have to suddenly impose painful austerity tax rises or spending cuts which of course leads to lower economic growth or alternatively resort to quantitative easing creating money which can exacerbate inflation in the economy now if you were to borrow in a recession this could help boost the growth rate and the high growth can help you pay back the debt the problem that the US and many other countries have is that debt is rising just as rates of economic growth is slowing down and this is creating a dynamic where the interest rate on debt is becoming much higher than the growth rate and this is when debt really becomes a problem because the burden of debt interest payments rises and it can be quite difficult to deal with just ask Greece and Italy the problem is that the US tariff war threatens the worst of both worlds higher prices and lower economic growth independent studies suggest that the new tax cuts in the recent US budget will do very little to boost economic growth and will be outweighed by the negative effects of tariffs and trade uncertainty markets fear not so much outright default but the rise of default by stealth uh inflation reducing the real value of bonds a devaluation of the dollar reducing the real value of foreign holders and it will be a big problem if US growth continues to slow and inflation keeps going up now just a few quick questions weren’t bond yields much higher in the 1970s so why were we now only just 5% well the high bond yields of the late ‘7s early 80s was a reflection of very high inflation and high central bank interest rates rather than fears of a debt insolveny in those days debt as a share of GDP was much lower and even with those bond yields some investors were losing out because inflation was higher than the bond yield at which they bought it at is the US going to go bankrupt well on current economic policy US debt is certainly set to soar to over 180% of GDP and the recent proposed tax cuts will supercharge this rise in debt but it is important to point out this trajectory could easily be changed by for example just not cutting taxes for the wealthy collecting missing tax revenues and many other solutions the US really is a wealthy economy very high GDP and they could easily keep debt stable with relatively minimal pain but it does require political will and markets are concerned that it isn’t there there seems little interest in balancing the budget or at least making debt sustainable another question since the US borrows in dollars is it not in a privileged position and to some extent yes it is many emerging economists get into debt difficulties because they borrow in foreign currency eg argentina borrowed in dollars so when its currency fell it couldn’t pay back its dollar debts and this led to several default in Argentina and as a consequence more expensive to borrow in the future now the US of course borrows and sells dollars and it can print as much dollars as it wants to pay it debt off but it doesn’t come without no cost because if you increase the money supply too much it will start to cause inflation and devalue the dollar further it could also make countries much less willing to buy US debt in the future and that will cause relatively higher bond yields what else could go wrong the surge in US bond yields and higher interest rates could definitely cause problems in the US housing market us house prices really expensive overvalued record price to earning ratios many households have already very small margins uh consumer credit going up and higher interest rates could cause a big fall in house prices and they almost always cause recessions if house prices do fall shouldn’t the Fed just cut interest rates to reduce bond yields well it’s a tricky dilemma for the Fed because lower interest rates would help reduce bond yields possibly increase growth but inflation is still above target and consumers have quite high inflation expectations so interest rate cuts could worsen inflation which will go up because of the tariffs coming in and also the rise in bond yields is primarily due to uncertainty and rising deficits so it’s not guaranteed that cutting central bank rates would actually stabilize bond yields especially if markets think that inflation is going to go up as a result and there’s no plan to reduce the deficit is it all going to end in a financial meltdown well don’t forget Greece had debt of 250% of GDP in 2019 and looked a bit of a basket case but since then the economy has turned around debt has fallen growth has picked up so Greece can turn around the collapsing economy the US could easily avoid some of the dire predictions if it um changed policy what about the UK is the UK debt getting out of control well demographic pressures certainly putting upward pressure on debt and this video looks into all the problems but also uh the potential solutions

Long-term bond yield are rising fast. Why are they rising? and What are the impact of rising bond yields.

0:00 Japan rates
2:15 Does it matter if yields rise?
4:36 US Bond Market
6:42 Responding to Bond Yields
8:07 Questions on Debt

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Sources:
https://www.businessinsider.com/tax-cuts-tariffs-fiscal-policy-economic-growth-stock-market-goldman-2025-5
https://www.ft.com/content/c2dd8918-d6c1-4c60-b0d8-4959e287b11a
https://www.theatlantic.com/economy/archive/2025/05/trump-tax-cut-debt/682922/?gift=ANWOiGT20VqPUtNJ4aNwmfe88zKlyCOxFwNqQba8RAg
https://www.dw.com/en/japans-economy-shrinks-more-than-expected/a-72561544
https://www.stlouisfed.org/on-the-economy/2025/apr/what-is-behind-japan-high-government-debt
https://www.ft.com/content/fdad7e0b-aa23-4b7b-8f1a-fc1d48468631

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