Bond investors are the economy's bond vigilantes. ... So if the fiscal and monetary authorities won’t regulate the economy, the bond investors will. – Ed Yardeni, 1983
Bond investors are the economy's bond vigilantes. ... So if the fiscal and monetary authorities won’t regulate the economy, the bond investors will.
– Ed Yardeni, 1983
For decades, Japan’s government bond market was synonymous with yield suppression. Thirty-year Japanese Government Bonds (JGBs) hovered near zero as the Bank of Japan (BOJ) relied on yield curve control, quantitative easing (QE) and entrenched deflation. That era has ended. As of early this month, Japan’s 30-year yield has surged past 3.3% – its highest level since Japan began issuing 30-year bonds in 1999.
The breakout shows developed-market yield curves are repricing at the long end. From U.S. Treasuries and U.K. Gilts to French OATs and JGBs, investors now demand higher yields to reflect fiscal debt, persistent inflation and trust in policy.
The JGB breakout is historic. For the first time in nearly a half-century, Japan’s core inflation is running above U.S. core inflation – excluding brief, tax-driven spikes from past value-added-tax hikes. The country long considered the world’s deflationary anchor is now grappling with sticky price growth.
At the same time, the BOJ still maintains deeply negative real short-term policy rates, even as long-end yields push higher. This has created a striking divergence: The short end remains pinned by policy while the long end has slipped free.
Japan’s fiscal position is uniquely stretched. With debt near 250% of GDP, higher yields quickly raise servicing costs. That shift forces investors to confront Japan’s fiscal sustainability.
Japan’s breakout mirrors moves in the U.S. and Europe, where steepening reflects long-end weakness, not optimism.
Across developed markets, old anchors are fading: QE is gone, inflation is sticky, and policy credibility is questioned. A revived term premium is emerging as investors demand extra compensation to hold duration.
This steepening is a developed-market reset: Yields have climbed in the U.S., Europe and Japan while falling in China and parts of Latin America, reflecting pressures unique to developed economies.
The convergence between JGBs and Treasuries underscores this global reset. The U.S. 30-year yield hovers near 4.9% while Japan’s sits at 3.3%. The spread between the two, now around 160 basis points, is the narrowest in years.
China provides a striking contrast: Its 30-year yield, near 2.1%, sits a record 286 basis points below U.S. long bonds and has fallen below Japan’s for the first time in decades. The inversion highlights the divide between weak-growth economies (China) and developed markets with fiscal stress and sticky inflation (Japan and the U.S.).
The surge in Japan’s long bond ends the last anchor of the zero-yield world and confirms the four-decade bond bull market is over. Investors now demand higher returns for long-term debt.
As noted in A Steepening Back to Average: “Investors aren’t flocking to safety — they’re reassessing what safety means.” That message now applies in Tokyo as well as in Washington.
The long end doesn’t lie. From Treasuries to JGBs, developed markets are repricing the cost of trust — and the last holdout has joined the reset.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
