Global bond markets are under new pressure as investors sell government debt after US borrowing costs increased and oil prices rose again. Japan’s 10-year government bond yield touched 3% on Tuesday, September 1, for the first time since September 1996. Investors are reacting to a broad sell off in bonds, the Iran war shock, and expectations that central banks will keep raising interest rates because inflation is not going away.
The move in Japan followed a major rise in US borrowing costs. On Monday, the US 10 year Treasury yield rose up to 5%, which is a big deal since this benchmark influences trillions of dollars in assets globally. Aside from a brief rise to 5% last year, US 10 year rates have not stayed around this level since before the global financial crisis. Meanwhile, Brent crude, the global oil benchmark, was up 1.3% at $107.10 in Asian trading, raising concerns that high energy prices will keep inflation under pressure.
Japan’s Bond Yields Cross 3%
Japan’s 10 year bond yield crossed the key 3% mark as investors kept selling Japanese government debt. The move reflects expectations the Bank of Japan will keep tightening. Japan’s benchmark stands at 1%, reached via increases to 0.75% last December and 1% in June. Bank of Japan Governor Kazuo Ueda is expected to raise rates by 0.25% points to 1.25% this week. If that happens, Japanese rates would hit their highest level in 31 years.
Markets are getting more confident that the Bank of Japan will lift rates in September, and they are also betting on a higher terminal rate. Masahiko Loo, senior fixed income strategist of State Street in Tokyo, says these expectations keep pushing Japanese government bond yields upward. Higher yields in Japan are also changing how global investors view Japanese assets. Loo explains foreign investors are coming back, attracted by better domestic returns and strong prospects from Japan’s AI led investment cycle. Still, the yen weakened 0.2% to ¥154.64, even with expectations of higher Japanese rates.
US Yields and Oil Add to Global Pressure
Rising Japanese yields are part of a wider move. Government borrowing costs are climbing across major economies including the US, Germany and Australia. Mansoor Mohi-uddin, Bank of Singapore’s chief economist, said government bond yields were increasing globally, with demand hurt by the Middle East oil shock, persistent inflation and central banks resuming interest rate hikes. The new oil price ride adds pressure. Brent crude increased 1.3% to $107.10 in Asian trade. Higher oil prices can add to inflation concerns, making it harder for central banks to ease monetary policy.
US 10 year yields reaching 5% is grabbing attention because it affects borrowing costs and asset prices across global markets. This followed a bond sell off triggered by the Iran war shock. But Asian stock markets stayed steady. Japan’s Nikkei 225 rose nearly 0.3%, Hong Kong’s Hang Seng dropped 0.2%, and Taiwan’s Taiex stayed flat. Strategists say US borrowing costs would need to rise further before investors really start moving out of stocks. Frank Benzimra, Société Générale’s head of Asia equity strategy, thinks it would take another 100 basis points to create more serious negative implications for the S&P 500.
Also read: US Stock Futures Fall After After Iran Strikes Lift Oil Prices
AI Demand Supports Asian Markets
So far, higher US rates have not caused a broad Asian sell off. The main reason is strong US demand for AI hardware, which helps support major Asian economies. East Asian exporters supplying the US AI hardware are seeing solid demand. BNP Paribas analysts say this export strength could shield Asian currencies from some of the usual pressure caused by rising US rates.
Chandresh Jain, emerging markets rates and FX strategist at BNP Paribas, says the bank does not expect Asian currencies to weaken much as a result of the US move. In short, Asian markets are divided in two directions. Rising US and Japanese borrowing costs put pressure on bonds, while robust AI hardware demand continues to support major parts of the region’s economy and financial markets.
