As this week has developed we have seen something in play that raises a wry smile from someone like me who has spent much of his career working in bond markets. It is being expressed in two main ways and let me start with what is considered the conventional benchmark these days.
It’s like clockwork. The 10Y Note Yield is now above 4.50% for the first time since June 2025. This is the same level that resulted in President Trump’s “90-day tariff pause” in April 2025. (The Kobeissi Letter)
So we have higher US bond yields to consider and it is 4.54% as I type this. There are many consequences from this but first we have also seen a big figure change in the long bond.
The U.S. 30-Year Yield is now 5.03%. It has only been higher for a handful of days in the last 19 years. And it is now just 8 basis points from a new 19-year high. (Jim Bianco)
Part of the issue here is that we count in base ten. But there has been an underlying move here and the US 30-year has risen to 5.08% this morning. So the bond vigilantes are back in the house and quite a few economic metrics will be singing along with Hard-Fi.
Can you feel it?
Feel the pressure… Rising
Pushing down on me, oh, Lord!
Pressure, pressure
Pressure pressure pressure.
Why?
If we ask the Carly Simon question I think that there are two main factors in play. The first is a theme that I have been pointing out since the Covid Pandemic which is not only was there large-scale borrowing back then but countries have continued to borrow. For example here are the US figures from its Treasury Department.
In FY 2025, the federal government spent $7.01 trillion and collected $5.23 trillion in revenue, resulting in a deficit. The amount by which spending exceeds revenue, $1.78 trillion in 2025, is referred to as deficit spending.
For all the debate about the differences in policy between Presidents Biden and Trump they are both what Shirley Bassey would call “Hey Bid Spender”. Also along the way we have seen bond yields rise which not only makes deficits more expensive it has an increasing effect over time. So now we have a double whammy of the impact of the rises since 2022 and the new even higher levels.
The other factor I looked at on Wednesday.
To my mind quite a wave of inflation looks to be on its way and let me give you some examples from the Financial Times twitter or X feed from this morning……It is everywhere you look if you choose to. Plus wars are usually inflationary.in isolation due to the extra spending.
The examples are in the piece if you wish to look but the central point is that a wave of inflation is on its way. We do not know how much but the longer the Straits of Hormuz remain shut the worse it will be. So bond markets are looking for more yield to compensate for the extra inflation risk.
Establishment Failures
There have been two clear failures from those who are supposed to be our elders and betters. The various political classes around the world have not adjusted to the higher bond yields and have simply carried on spending as if borrowing was free. Indeed some countries in the Euro area in particular were paid to borrow.
Next up has been the long list of failures of the central banks. Their crime started as hubris when drunk on their own power they thought they could slash interest-rates to zero and in some cases below and pump up the money supply via financing government deficits. This was a perversion of their role as they helped create the inflation they are supposed to control.
But it has turned out to be worse for the central banksters in several ways. Firstly their fantasies that they could control interest-rates and indulge in QE to infinity have imploded. If you look back around a decade on here you will see examples of the Bank of England drunk on its own power thinking the worst case scenario was a 1% Bank Rate which then rose as high as 5,25%. This means that their balance sheets look awful on a mark to market basis and increasingly awful as bond yield rise. They of course deny that this matters.
Next up is that after the debacle of their claims about “temporary” or “transitory” inflation nobody believes this stuff anymore.
She also said she saw a lower risk of the war in the Middle East fuelling a “nasty” spiral of rising wages and prices compared with the fallout from the Russian invasion of Ukraine.
That is Bank of England Deputy Governor Sarah Breeden in the Financial Times.There is a secondary impact here because you can argue they have lost control over interest-rates if we note some more words from her.
Breeden signalled that even if rates did eventually have to rise, it could wait until later in 2026, despite markets pricing in two or three UK interest rate rises this year with the first coming in the summer.
Whilst they retain control over Bank Rate it at 3.75% is very different to the UK two-year yield which is 4.56%. The UK is an extreme case right now but if we look at the US we see bond yields above the official interest-rate when the story is supposed to be about cuts at least according to President Trump.
Consequences
Mortgage Rates
This is the simplest effect of higher bond yields. Yesterday the US 30-year yield dipped very slightly to 6.36% but the bond yields above suggest that rises are on the way. This will apply pressure on the central banking Holy Grail of house prices as well as the wider economy.
The International Effect
Japan
This is an area we have been following closely and after the years of the Bank of Japan enforcing a ten-year yield of 0% we now see this.
*JAPAN’S 40-YEAR YIELD RISES 5BPS TO 4.2%
*JAPAN’S 10-YEAR YIELD RISES 7BPS TO 2.7%
*JAPAN’S 5-YEAR YIELD RISES 5BPS TO 1.995%
Japan’s bond market is blowing up. (Jesse Cohen)
These are multi-year highs as Investing.com points out.
JAPAN 20-YEAR YIELD RISES TO 3.69%, HIGHEST SINCE 1996.
Among the consequences here are an impact on the stock market which has been given some food for thought. Up to now stock markets have been in a form of denial.But the Japanese Yen has been falling again because relative yields have not changed much.
The loss ledger on the bond position of The Tokyo Whale must require a lot of red ink.
Germany
Even the German position is coming under pressure. Their ten-year yield has moved above 3.1% and let me give you two comparisons.The first is that it was paid to borrow at the ten-year maturity in Covid times and when it began its recent fiscal expansion plans it was 2.4%. So the water is warming up as we see a new type of German exceptionalism.
Friedrich Merz vows to oppose new EU debt despite Germany’s borrowing spree. (Financial Times)
The essential issue here is as I pointed out on the 8th of this month is that Germany’s economic model has been broken by its energy policy.
Countries which use the US Dollar
These will be pretty directly affected as they borrow at rates which are a spread over the US ones. Then there are others more indirectly affected as the US Dollar rises. I looked at India and the Rupee on Wednesday, but there are others.
Bank Indonesia to hike next week. IDR will need help with global rise in yields. (Trinh)
Comment
I would imagine that the central banks will be burning the midnight oil this weekend as they try to figure a way out of this. One issue is that their minds have often been closed to the consequences of their past actions. But some people never learn. For example at a time like this you might think that the MMT or Modern Monetary Theory beast has been slayed yet apparently not.
Liverpool Wavertee MP Paula Barker thinks Andy Burnham as PM could make the bond markets ‘fall into line’. ( @tonymc39)
That is a form of implied MMT but there have been more explicit efforts.
The legal walkaround: the Fed, an agent of the gov, lends the funds to the primary dealers that buy the Treasury (also an agent of gov) securities. Functionally there is no restriction of nominal deficit spending. If there was it all would have hit the wall long ago, no? (@wbmosler)
Let me finish of by reminding you of the Japanese version which was called Yield Curve Control. It used to have lots of fans if social media is a guide yet they have all gone quiet. Can anybody think why?