Treasuries dropped hard on Tuesday as bond markets from the US to Europe got slammed by worries out of Japan. The yield on the 10-year note jumped four basis points to 4.42%, extending its longest climb since April.
But the bigger hit landed on the 30-year Treasuries, now creeping toward 5%, just ahead of a scheduled government auction of long-term debt. That’s not normal volatility, that’s investors running for the exit.
According to Bloomberg, the selloff started with Japan and quickly spread to global peers, dragging down anything long-dated and illiquid.
The problem came from Tokyo. Officials there might boost debt sales, and that’s got bond traders panicking. When Japan dumps more long-term bonds into the market, the effect hits everywhere.
Japanese yields moved sharply, with their 30-year rate nearing a record.
US 30-year Treasury yield chart. Source: Bloomberg
Germany’s long yields also surged, climbing to their highest since March.
Lyn Graham-Taylor, strategist at Rabobank, said bluntly, “The supply-concern driven steepening of Japanese government bonds appears to be responsible for the move higher in bund and US Treasury yields this morning.”
Japan’s fiscal plans shake global bond confidence
Japan’s long bonds have a habit of falling fast. It’s happened before, and each time it sends a shockwave through US and European markets.
Right now, that pressure is back. The BOJ is trying to clean up years of loose monetary policy, but it’s cornered. Growth is slowing, and Trump’s White House has ramped up trade tariffs again, threatening Japan’s exports at the worst possible time.
But there’s more. Japan’s bond desks are under stress because of upcoming elections set for July 20. With that vote looming, traders expect politicians to promise extra cash spending to win over voters. That means more borrowing, more supply, and more long bonds flooding the market. Voters now have a choice between the ruling Liberal Democratic Party’s cash handouts or the opposition’s tax cuts, and markets hate both.
Japan’s 30-year yield surged past 3% on Tuesday, getting dangerously close to its all-time high from May. Their super-long bonds have been sliding for days. This isn’t isolated. Britain faced a similar mess last week. Investors dumped gilts fast over budget concerns, and the debt office had to reduce long-term issuance. Japan’s doing the same. Fewer buyers. Bigger supply. More selling. You get it.
The backdrop is even messier. Traditional buyers are backing away from long-term bonds altogether. These assets carry more interest rate risk, and with central banks stuck between inflation and recession, no one wants to hold them.
Lower liquidity only makes those selloffs hit harder. Once the dominoes fall, yields spike and prices tank. That’s exactly what happened this week.
BOJ struggles as real wages collapse
The Bank of Japan is stuck in the middle of a policy trap. It wants to raise rates, but the economy is tanking. In May, real wages collapsed by 2.9% from a year ago, the sharpest fall in 20 months. That was worse than the revised 2% decline in April. May marked the fifth straight month of wage erosion, even though nominal salaries are technically rising.
The wage data came straight from Japan’s health, labor and welfare ministry, and it paints a brutal picture. Unions scored what looked like a win this year.
The Japanese Trade Union Confederation, or Rengo, secured a 5.25% pay bump in this year’s spring talks, the biggest since 1991. But with inflation still well above the central bank’s 2% target, the gains aren’t sticking. The latest inflation read hit 3.5%, eating straight through those nominal increases.
Since December 2021, Japan has posted nominal wage growth every month. But in over 30 out of the past 41 months, real wages have actually declined once you factor in inflation. That collapse in real paychecks is exactly what the BOJ wanted to avoid.
For years, the central bank said it needed a “virtuous cycle” of higher wages fueling higher prices. But now, wages are collapsing, inflation is still high, and the economy is grinding to a halt.
The most recent GDP figures confirm that stall. Japan’s economy shrank in the first quarter, down 0.2% from the prior quarter. Exports dropped, and that hit a country where trade matters more than anything. With tariffs from the US and weak demand globally, Japan’s export machine is slowing down fast.
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