Revenge of the Bond Yields

The worst case scenario is that government bonds all over the world — the supposed foundation of the global financial system -- are not only NOT risk free, they may in fact be a ticking time bomb.

Source: Getty Images

Friday, May 23^rd, 2025

Bill Bonner, from the ranch at Gualfin, Salta Province

For a change of pace, today, we look at someone else’s problem.

And what we will see, alas, is that it is very similar to our own.

Here’s colleague Tom Dyson:

Japanese government bonds have been cratering in price. The price of the 40-year government bond is down about 25% since August and made a new low today. It now yields 3.14%.

Bloomberg:

Japan Bonds Plunge as Weak Auction Adds to Fear Over BOJ Retreat

The rout drove up the 20-year yield by about 15 basis points to the highest since 2000, while the yield on 30-year bonds climbed to the most since that maturity was first sold in 1999. Yields on the 40-year tenor rose to a record high.

The Prime Minister’s comparison of his own nation’s fiscal position to that of Greece this week sharpened the focus on Japan’s huge debt burden.

Bloomberg quoted a Japanese fund manager:

“I don’t want to touch super-long bonds. The only way to improve market sentiment for super-long bonds is for the authorities to take action.”

But what action can it take? Can Japanese politicians do what Americans cannot — cut spending? Aren’t they trapped in the same ‘inflate or die’ prison as US politicians?

Cut spending and the fake, credit-pumped economy collapses. Inflate…and it just gets worse, at least until interest rates rise and the whole shebang comes tumbling down.

The immediate problem as described by David Stockman:

After years of red-hot money printing and virtually zero central bank-pegged interest rates, the Bank of Japan has been forced into balance sheet shrinkage (QT), owing to a suddenly surging inflation rate that at 3.6% overall and 3.2% on the core CPI measure is actually higher than in the US, and represents a drastic break from decades of near zero inflation.

Take a good look at Japan. For there you will see key elements of our future too. Japan must now finance government debts two-and-a-half times the size of its GDP. And inflation and interest rates are going up. If the overall rate were just 2.5%, the interest payments alone would cost Japan about half its tax receipts.

The wonder of Japan’s enigmatic financial system was that the country could go so far into debt… and still pay the lowest interest rates in the world. Five years ago, the yield on a 10-year Japanese bond was 0.00%. Even today, the yield on a 10-year Japanese government bond is only 1.58%. This is despite the highest debt/GDP rank in the developed world.

In 1990, Japan’s public debt was about 30% of its GDP — even lower than the US. But then, both countries’ debt exploded. Today, US debt/GDP is over 120%. But Japan’s debt/GDP is 240%.

And yet, until now…there was hardly a peep of discontent among lenders. Who would buy a bond with a 1% yield…from a country with more than twice as much debt as GDP? How would they expect to be repaid? This was an anomaly in the financial world — all-risk, no reward. It seemed to defy the rules of finance.

Some economists and political hacks argued that Japan’s example really did prove that ‘deficits don’t matter.’ At this very moment, no doubt, some ‘experts’ still cite the Japanese experience, claiming that the increased debt and deficits in the Republicans’ ‘Big, Beautiful Bill’ won’t actually ‘crowd out’ private borrowing or slow the economic growth of the country.

For more proof, they refer to the period in the US — 2000 to 2023 — when interest rates declined, even as federal debt ballooned. They insist that increased debt did not make it harder to borrow; it made it easier.

The simple explanation, however, is that the feds not only borrowed more money, they created it…as much as they needed…and lent it to themselves at lower and lower interest rates. This fake capital distorted the whole economy…leading both the US and Japan to the debt crises both now face, dead ahead.

The laws of finance may be flexible…frustrating…and fairly fickle…

But that doesn’t mean you won’t get punished if you do something really stupid.

And this week, the hanging judge was back in town and carpenters began work on the scaffold. Yields moved up all over the world — even in Japan.

Tom adds an alarm:

The worst case scenario is that government bonds all over the world — the supposed foundation of the global financial system -- are not only NOT risk free, they may in fact be a ticking time bomb on countless balance sheets.

Note to Bondholders: that thing now being placed around your necks…it ain’t from Christian Dior.

Regards,

Bill Bonner