Explained: why global bonds are selling off again and why Japan should worry

Japan's benchmark 10-year government bond yield climbed to 3% on Tuesday for the first time since 1996, as a broad-based selloff in global debt markets reflected growing concerns over inflation, government borrowing and the prospect of higher interest rates.

The selloff comes as rising oil prices and renewed military attacks in the six-month US-Israeli conflict with Iran add to inflation risks across major economies.

Brent crude futures rose above $91 a barrel, increasing concerns that higher energy costs could keep inflation elevated and force central banks to maintain or raise interest rates.

Yields were rising across major bond markets on Tuesday, from Tokyo and Sydney to London and New York, as investors demanded greater compensation for holding longer-dated government debt.

Global bond yields climb

Japan's 10-year government bond yield briefly reached 3%, its highest level in roughly three decades, before easing slightly to around 2.99%.

The selloff was not confined to Japan.

The US 10-year Treasury yield, a key reference point for mortgages, auto loans and other consumer borrowing costs, rose more than 2 basis points to 4.7840%.

The 30-year Treasury yield also increased by more than 2 basis points to 5.2740%, while the 2-year Treasury yield, which is particularly sensitive to Federal Reserve policy expectations, rose more than 1 basis point to 4.3604%.

In Britain, the 10-year gilt yield edged higher to 5.14%.

Germany's 10-year government bond yield, the benchmark for the euro zone, climbed to 3.34%, its highest level since 2011.

Australian 10-year yields recorded their sharpest rise in five months.

Middle East conflict revives inflation fears

The latest bond market pressure follows renewed military action involving the US and Iran.

The two sides exchanged fire for the first time in a month on Monday, with missiles and drones targeting Iranian rocket launchers on an island in the Strait of Hormuz. Iran subsequently targeted US military bases in Jordan and the United Arab Emirates.

US President Donald Trump threatened further military action, telling Fox News: “We’re going to hit them hard.”

The conflict is adding another layer of uncertainty to an already fragile inflation outlook.

The Strait of Hormuz is a crucial route for global energy shipments, meaning prolonged disruption could push crude prices significantly higher and raise transportation and production costs worldwide.

Tai Hui, APAC chief market strategist at JP Morgan Asset Management in Hong Kong, said the combination of seasonal energy demand and geopolitical risks could keep inflation elevated.

Fiscal concerns add to pressure on bonds

Geopolitical risks are only part of the story.

Global bond markets are also dealing with a surge in government and corporate debt issuance.

US government debt has surpassed $40 trillion, while major technology companies and hyperscalers are raising substantial amounts of money to finance data-center construction and other infrastructure supporting the artificial intelligence boom.

That means government borrowers and large corporations are competing for the same pool of investor capital.

Japan faces its own fiscal pressures.

Government ministries are expected to request a record amount in the initial budget for the next fiscal year, while Prime Minister Sanae Takaichi is pursuing an aggressive investment agenda.

Higher bond yields increase borrowing costs for governments, making fiscal sustainability a more pressing concern.

Fred Neumann, chief Asia economist at HSBC in Hong Kong, said Japan's rising yields reflect both domestic fiscal concerns and the broader global increase in long-term funding costs.

For Japan, the problem is particularly acute because the country carries one of the world's largest government debt burdens.

What the rising bond yields mean for Japan's bond market

The psychologically important threshold represents a major change for a market that spent years operating under near-zero interest rates and aggressive Bank of Japan intervention.

The rise reflects several forces at once, including expectations for higher inflation, increased government borrowing and speculation that the Bank of Japan still has further work to do in normalizing monetary policy.

Masahiko Loo, senior fixed income strategist at State Street Investment Management in Tokyo, described the milestone as a sign of normalization rather than an immediate crisis.

The move is nevertheless significant for global markets because Japanese investors have historically been major buyers of overseas bonds.

Japan's changing role in global bond markets

The rise in Japanese yields could have consequences far beyond Tokyo.

For years, extremely low Japanese yields encouraged investors to seek higher returns abroad.

Japanese institutions became major participants in overseas bond markets, helping support demand for US Treasuries, Australian government debt and European bonds.

That dynamic could gradually change as domestic Japanese yields become more attractive.

Loo said the issue was not necessarily a sudden wave of money returning to Japan, but a gradual reduction in Japan's role as a marginal buyer of foreign bonds.

That shift could keep upward pressure on long-term yields globally even if central banks eventually begin cutting short-term rates.

Markets await more economic signals

Investors are also watching the G20 finance ministers' meeting in Asheville, North Carolina, which is scheduled to conclude Tuesday.

A series of US economic indicators will also shape expectations for Federal Reserve policy, including the ISM manufacturing PMI and JOLTS job openings data.

The closely watched non-farm payrolls report is due Friday.

The data could determine whether the recent rise in Treasury yields reflects a temporary inflation shock or a more persistent repricing of interest-rate expectations.