Bond Market Fears Escalate As Yields Spike In The U.S. And Japan

Fear is rising among bond traders as yields continue to spike in both the U.S. and Japan.

There are growing worries on Wall Street of a capital flight from the U.S. and that the Japan carry trade might begin unwinding as long-dated bond yields near all-time highs.

Bond yields rise when investors sell the fixed-income assets. The current spike in the yields of U.S. Treasuries is being taken as a growing loss of confidence in the U.S.

As yields rise on 30-year and 10-year U.S. Treasuries, demand for 40-year U.S. government bonds has fallen to its weakest level since July of last year.

At the same time, Japan’s 40-year government bond yield has hit an all-time high of 3.689%, up 70-basis points on the year. Yields on other Japanese government debt are also rising.

Higher Japanese government bond yields could lead to a massive capital shift from the U.S. to Japan, leading to an unwinding of what’s known as the “Japanese carry trade.”

The carry trade involves borrowing in a low-interest-rate currency such as the Japanese yen and using those funds to invest in higher-yielding assets abroad, typically U.S. Treasuries.

Last summer, yen-based trades began to unwind sharply after the Bank of Japan raised interest rates, strengthening the Japanese currency and triggering a significant selloff in global markets.

In worrisome reports, analysts and bond traders are starting to use phrases such as “ticking time bomb” and “financial market Armageddon” to describe the situation developing in the bond market.

Those analysts and traders say that pulling funds from the U.S. and moving them to Japan as they chase higher yields or returns would trigger a massive downturn in global financial markets.

Japan operates the world’s second-largest bond market, currently worth $3.7 trillion U.S.

Some say a big shift in capital from the U.S. to Japan’s bond market would lead to an end of U.S. exceptionalism and could send stock prices sharply lower.

The current tumult in the bond market and risk that the Japan carry trade unwinds is being exacerbated by a strengthening yen currency and investors cutting exposure to the U.S. dollar.

Should America enter an economic recession in coming months, it will likely shake investor confidence in the U.S. even further, warn analysts.