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

The recent surge in US Treasury yields is triggering a chain reaction in bond markets across Japan, Europe and beyond. In Tokyo, the yield on Japan's benchmark 10-year bond soared to 3.03% on Wednesday before settling at 3.018%, marking its highest level since 1996. The five-year Japanese government bond also hit an all-time high yield of 2.295%.

Rising yields were driven by hawkish remarks from Hajime Takata, a member of the Bank of Japan's Policy Board, calling for more aggressive hikes to the central bank's policy rate. Some analysts predict the 10-year Japanese government bond yield could reach 3.2% next month, more than double its level when Sanae Takaichi became prime minister last year.

The sharp increase in Japanese government bond yields signals that the global economy is entering an era of higher interest rates, a shift from decades of low rates. The US 10-year Treasury note yield also jumped to 4.81% on Tuesday, its highest in nearly three years, with predictions of it reaching 5% adding further pressure on markets.

The 30-year US Treasury bond, a key benchmark for long-term rates, recently peaked above 5.3%, its highest since 2007. Similarly, yields on the 30-year British government bond and 10-year German government bond reached 28-year and 15-year highs respectively. A surge in oil prices due to renewed hostilities between the US and Iran is contributing to the bond sell-off, with investors fearing lower real returns.

Additionally, higher returns on newly issued bonds to attract buyers and heavy corporate bond issuance by US tech firms to finance AI investments are adding to the upward pressure on yields.