The government bond markets of the two major global economic powers, the United States and Japan, have recently simultaneously sounded alarms, highlighting the significant rise in global fiscal sustainability and interest rate risks, which may have profound implications for the economic landscape and investment strategies in the coming years.
US Fiscal Warning Deteriorates and Bond Market Faces Significant Pressure
The "Big and Beautiful Act" promoted by President Trump is expected to increase national debt by an additional $3.8 trillion over the next decade. The outside world jokingly calls it the "BBB Act," which is ironically close to the junk bond rating, reflecting the dangerous fiscal turn.
The Congressional Budget Office (CBO) estimates that the debt-to-GDP ratio will rise from the current 98% to 125%, and with the 10-year US Treasury yield breaking through 4.5% and the 30-year briefly exceeding 5%, future debt servicing pressure is set to increase dramatically.
Although the US Treasury insists on a strategic debt reduction and points out that foreign-held US debt increased by 12% year-on-year to $9 trillion in March (though this was before the new tariff announcement), the market has already revealed multiple warning signs:
- Long-bond yields rise instead of falling when economic data weakens
- Continued increase in US Treasury "term premium," highlighting fiscal risks
- Weakening foreign demand for US Treasuries
- Declining liquidity in the government bond spot market
Japan's Government Bond Storm Intensifies
On the other side of the Pacific, Japan's 20-year government bond (JGB) auction on May 20th also showed unusually low results. The bid-to-cover ratio was only 2.5 times, a new low since 2012, indicating extremely cautious market demand for long-term bonds.
After the auction results were announced, long-bond prices in the secondary market plummeted. According to Bloomberg data, Japan's 20-year government bond yield once soared to 2.6%, a new high since 2000. This poses a serious unrealized loss risk for institutions holding large amounts of Japanese long-term bonds, such as pension funds, insurance companies (Japan's largest life insurance company, Nippon Life, disclosed domestic bond book losses of 3.6 trillion yen, approximately 756 billion Taiwan dollars), banks (such as Norinchukin Bank), and international hedge funds.
Some institutions have already stated that they will shift towards low-risk assets or reduce bond holdings. The market is more concerned that if a large-scale cancellation wave occurs, it might force institutions to sell bonds, turning unrealized losses into realized losses, repeating the 2023 Silicon Valley Bank (SVB) bankruptcy case.
Investment Insights from the Global Bond Market Transformation
The warning signals from the US and Japanese government bond markets have important implications for the global financial market. Raymond James Investment Director Adam is closely monitoring whether the US 10-year Treasury yield will break through 4.5%. He points out that this level means mortgage rates could rise to 7%, putting pressure on the housing market and the overall economy, and is unfavorable for the S&P 500 price-to-earnings ratio. If the yield further rises to 4.75%, the US stock market outlook will be even less optimistic. He warns investors to be wary of bond market signals and consider diversifying investments or reducing cyclical stock positions.
Trump's "Big and Beautiful Act" and Japan's weak government bond auction jointly reveal the severe challenges in fiscal discipline for major global economies, sounding the alarm for governments and reminding investors to be more cautious in volatile markets, considering a diversified investment portfolio strategy to address risks.
