Japan is the detonator. The United States is the bomb.
Cracks in global bond markets have turned into fractures. The auction of 20-year Japanese Government Bonds (JGB) was the worst since 1987.
This is not a singular technical glitch, but the first domino piece falling in a structure that has held the global system together for decades.
The Japanese bond market is not isolated. For many years, Japanese institutions have supported the global bond market through yen-funded carry trades and large purchases of foreign bonds, particularly U.S. Treasuries. This era is coming to an end.
The U.S. Treasury bond market is under pressure. Not only due to inflation but also because foreign buyers, especially the Japanese, are leaving.
• The United States has over $9 trillion in debt maturing within 12 months.
• The budget deficit remains close to 8% of GDP.
• The average debt maturity is shorter than in Japan, and the global base of buyers is shrinking.
Unlike Japan, which can handle the difficulties of its own bond market, the United States is at the center of the global dollar system. If confidence is broken here, the chain of guarantees collapses. Commodity prices are revalued. Emerging markets crash. Japan's failure is a signal. The consequences will be determined by America's response.
The Japanese bond market may be the trigger, but the bomb is still in the hands of the United States.