Soaring US Treasury yields trigger domino effect for bonds across Japan, Europe

The downward spiral in government bond prices that commenced in the United States is now impacting Japan and other key economies, with rising yields driving up borrowing costs for governments and other borrowers to their highest levels in decades. Japan's benchmark 10-year bond yield neared 3.03% on Wednesday, its highest since 1996.

The five-year Japanese government bond yield also surged 4 basis points to an all-time high of 2.295%. Analysts anticipate the 10-year Japanese bond yield could reach 3.2% next month, double its level when Prime Minister Sanae Takaichi took office last October. The sharp increase in Japanese government bond yields signals that the global economy is transitioning into a high interest rate era.

The 10-year US Treasury note yield surged to 4.81% on Tuesday, its highest in nearly three years, with predictions of it reaching 5% further alarming markets. The 30-year US Treasury bond, a key long-term interest rate benchmark, recently peaked above 5.3%, its highest since 2007. At the same time, yields on the 30-year British and German government bonds also hit 28-year and 15-year highs, respectively.

The bond sell-off driving yields higher is fueled by a surge in oil prices after renewed US-Iran tensions, resurfacing inflation fears that prompt investors to dump bonds in search of better returns. Additionally, governments are offering higher yields on newly issued bonds to attract buyers, while heavy corporate bond issuance by US tech firms to fund artificial intelligence investments adds further pressure on yields.