Japan owes more relative to the size of its economy than any government on Earth at over 250% of GDP. For 30 years that didn\u2019t matter, because Tokyo could borrow almost for free. Now the bill is arriving.<\/p>\n
Benchmark yields just hit 3%<\/a>, a level the finance ministry never budgeted for. The move is rattling global markets, and sharp swings in the yen have an outsized ability to shake financial systems worldwide.<\/p>\n The plot thickens because US Treasury yields seem to be racing Tokyo\u2019s higher. The 30-year US Treasury yield recently jumped to two-decade highs near 5.3%.<\/p>\n Inflation fears are driving both moves. With the war in Iran dragging on and oil above $95 a barrel<\/a>, bond bears have the wind at their backs. Just as powerful a driver: fiscal policy gone slack, and central banks that increasingly look behind the curve on tightening.<\/p>\n An added wildcard is how US-Japan yield dynamics have become entangled in geopolitics between Washington and Tokyo, raising the stakes for world markets.<\/p>\n This week, US Treasury Secretary Scott Bessent escalated his months-long campaign pressuring the Bank of Japan to raise rates \u2014 the logic being that if he and President Donald Trump can\u2019t get their way with the Federal Reserve, pushing Japanese rates higher is a workable Plan B.<\/p>\n As Group of 20 officials gathered in North Carolina this week, Bessent called on BOJ Governor Kazuo Ueda to \u201cdo the right thing<\/a>\u201d on monetary policy to reverse the yen\u2019s slide to 40-year lows. <\/p>\n On August 31, Bessent told CNBC: \u201cI have information that the market doesn\u2019t have. And it\u2019s my belief that the Japanese government and the BOJ will do the things that will lead to a stronger yen<\/a>.\u201d<\/p>\n That followed a joint Treasury-Tokyo operation to stabilize the yen \u2014 the first such coordinated move since 1998, driven partly by fear that Prime Minister Sanae Takaichi\u2019s government might sell US Treasuries to fund its own intervention. Japan holds more US government debt than any other country, over US$1.1 trillion, so Washington took pains to sell euros rather than dollars to buy yen, sidestepping that risk.<\/p>\n Bessent then tried a Japan-style tactic: capping yields through large-scale government bond buybacks, hoping purchases of at least $4 billion per operation<\/a> would push borrowing costs down. Markets haven\u2019t cooperated.<\/p>\n The yen is back near 160 to the dollar, and long-term US yields are climbing again. \u201cThe bond market appears to be completely ignoring the US Treasury,\u201d says market commentator The Kobeissi Letter.<\/p>\n The dynamic should unsettle a Treasury Secretary who cut his teeth in hedge funds and has seen firsthand how fast a yield spike can rattle markets, and how quickly an unwind of the yen carry trade can destabilize the global system. <\/p>\n Bessent worked for George Soros in the early 1990s when Soros\u2019s short position famously \u201cbroke the Bank of England.\u201d And the same team was later blamed for crashing currencies in Hong Kong<\/a> and Malaysia during the Asian financial crisis.<\/p>\n Bessent\u2019s market instincts are being tested in real time, and his fiscal management isn\u2019t exactly inspiring confidence in the dollar \u2014 not with US national debt above $40 trillion, or roughly $117,000 per person<\/a>. <\/p>\n Under Bessent\u2019s watch, the US debt-to-GDP ratio stands at 125%. For comparison, economist James Lindsay of the Council on Foreign Relations notes that the massive borrowing that financed America\u2019s World War II effort only pushed debt-to-GDP to 106%.<\/p>\n The trend is worse than that comparison suggests. The nonpartisan Congressional Budget Office projects this fiscal year\u2019s federal deficit will hit $2.1 trillion \u2014 about 6% of GDP. As Lindsay puts it, this is happening \u201cat a time of near-full employment when the government balance sheet should be improving, not deteriorating.\u201d<\/p>\n The 2021\u20132025 Biden administration bears its share of blame for the run-up in spending, but Bessent\u2019s tenure will be remembered for milestones of its own \u2014 including a fiscal year in which the US paid more than $1 trillion in interest on its debt, comparable to annual defense spending.<\/p>\n The trajectory is what worries analysts. The Peterson Foundation projects interest payments<\/a> will more than double over the next decade, and Lindsay and others think even that estimate may be too optimistic. Rather than address the underlying debt problem, Bessent has leaned on gimmicks like bond buybacks\u2014treating symptoms, not the disease.<\/p>\n Even his former mentor, investing legend Stanley Druckenmiller, panned the approach, arguing that \u201ca credible fiscal package would do more for the long end of the curve than a buyback program a thousand times this size.\u201d No such fiscal package appears to be forthcoming from the Trump White House.<\/p>\n It\u2019s not just the US, of course \u2014 the surge in long-term bond yields is a global phenomenon. \u201cThe confrontation between bond markets and policymakers is becoming a battle of attrition,\u201d says Geoffrey Yu, a strategist at BNY. \u201cPersistent inflation, fiscal concerns and energy risk continue to push investors to demand greater compensation.\u201d<\/p>\n Still, the dollar is the epicenter of the problem. The real risk is that the central banks who effectively serve as Washington\u2019s bankers<\/a> lose confidence in Bessent\u2019s approach \u2014 a group that includes not just the BOJ but the People\u2019s Bank of China, which holds $633 billion in US Treasuries.<\/p>\n Thirty-year Treasury yields have now stayed above 5% for 55 straight days, the longest such stretch<\/a> in 20 years, and in mid-August the Treasury sold 30-year bonds at the highest rate in 25 years \u2014 a clear sign investors are demanding more compensation to keep financing Washington\u2019s deficit.<\/p>\n US Treasury investors \u201cremain reluctant to add duration,\u201d notes Bank of America strategist Meghan Swiber. Michael Stanczyk, a debt portfolio manager at Allspring Global Investments, agrees long-term yields could keep climbing \u201cas investors continue demanding greater compensation for inflation and fiscal risks.\u201d<\/p>\n The trend line is what should worry investors most: US government debt has grown by a third in under five years. With the Iran war adding to inflation pressure, the odds are rising that the Federal Reserve will need to raise rates again as soon as its September 16 meeting \u2014 with more hikes potentially to follow.<\/p>\n That sets up a collision with the Trump White House. Trump pressured the Fed throughout his first term (2017\u20132021), but his second term has escalated things dramatically. First, by trying to fire or indict former Fed Chair Jerome Powell<\/a>. Then by moving to remove Fed Governor Lisa Cook and stacking the Fed board with loyalists, including White House economist Stephen Miran.<\/p>\n A politicized Fed could be a nightmare for global markets, especially given ongoing efforts by other nations to reduce reliance on the dollar and US Treasuries. The danger is that Trump\u2019s approach spooks the officials in Tokyo and Beijing who, between them, hold more than $1.7 trillion in US government debt.<\/p>\n It\u2019s hardly reassuring that Bessent seems in denial about America\u2019s vulnerabilities. On Sunday, he told Reuters<\/a>, \u201cI\u2019m not sure where the bond market turmoil is,\u201d arguing that the US bond market is the \u201cbest performing\u201d globally this year, and adding that \u201cwhat\u2019s important, too, is that we are growing.\u201d<\/p>\n Bessent also defends his interventions as less aggressive than past ones by former European Central Bank President Mario Draghi or former BOJ Governor Haruhiko Kuroda. He said: \u201cThey didn\u2019t seem to have a problem when Mario Draghi did it in Europe. They didn\u2019t seem to have a problem when the Japanese bought up half their bond market.\u201d<\/p>\n Bond markets are cracking globally as geopolitical, technological, and demographic pressures collide. Borrowing costs are hitting multi-year highs from Washington to London to Tokyo, and elevated yields look here to stay.<\/p>\n Nowhere more so than Japan. The global selloff has put Tokyo in an uncomfortable spotlight, raising fears that \u201cthis time is different.\u201d For now, the $32 trillion US Treasury market is drawing most of the attention. US 30-year yields are the highest since 2007<\/a> \u2014 above the 5% \u201cline in the sand\u201d investors thought would hold, notes Ed Al-Hussainy of Columbia Threadneedle.<\/p>\n