Japan’s Bond Market Meltdown Could Crash Global Stocks

TLDR

Japan’s bond yields hit record highs as the country exits decades of deflation, threatening the profitable yen carry trade Rising Japanese government bond yields could force investors to unwind positions funded by cheap yen borrowing US Treasury and equity markets face potential selling pressure as Japanese money may flow back home Nasdaq 100 paused its 30% rally from April lows as bond market turmoil creates uncertainty Both US and Japanese bond yields are climbing, raising concerns about global market stability

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Japan’s bond market is showing cracks that could shake global financial markets. The country’s 30-year government bond yields hit record highs of 3.197% this week. This marks a major shift for a nation known for ultra-low interest rates.

The Bank of Japan raised rates for the first time in 17 years in March 2024. Core inflation in Japan now exceeds levels in the US and eurozone. This forces the central bank to consider tighter monetary policy.

Japan's bond market is imploding:

Japan's 30Y Government Bond Yield has officially surged to its highest level in history, at 3.15%.

For decades, Japan was known for low long-term interest rates.

Now, they are dealing with high inflation, shifting policy outlook, and a… pic.twitter.com/kZjoIurhub

— The Kobeissi Letter (@KobeissiLetter) May 20, 2025

The rising yields threaten the popular yen carry trade strategy. Investors borrow cheap yen at low rates and invest in higher-yielding assets elsewhere. This trade has funded purchases of US Treasuries, stocks, and other investments for years.

Japan’s latest bond sale attracted less demand than expected. Debt sold at lower prices and higher yields than anticipated. Foreign buyers have become the main source of demand for long-term Japanese government bonds recently.

Rising Yields Shake Market Foundations

The unwinding of yen carry trades could create a “loud sucking sound” in US financial assets. Money borrowed in Japan often flows into US debt markets. A reversal could pressure both Treasury bonds and equity markets.

US bond yields are also climbing higher. The 30-year Treasury yield broke above 5.00% and approaches the October 2023 high of 5.178%. Congress is considering a tax bill that would increase the federal budget deficit.

Stock markets are feeling the pressure. The Nasdaq 100 paused its 30% rally from April lows this week. Daily momentum indicators moved from oversold to overbought levels during the recent surge.

Nasdaq 100 Jun 25 (NQ=F)

The index created higher highs and higher lows while reclaiming moving averages. However, Wednesday’s bearish engulfing candle pattern suggests more weakness ahead. Support levels sit around 21,100 and the 20,275-20,535 range.

Market Volatility Returns

European markets reached new all-time highs along with Bitcoin during the recent rally. The Nasdaq has not yet tagged its December peak despite the strong performance. Renewed momentum could drive the index to new highs soon.

Key resistance levels include Tuesday’s low near 21,300 and the 21,500 zone above. A break higher could lead to moves toward 22,000 and the all-time high at 22,425.

The combination of rising bond yields in both countries creates uncertainty. Traders worry about another episode of yen carry trade unwinding. Last summer’s similar event disrupted global equity markets.

Japan’s exit from deflation represents a historic shift. The Bank of Japan scaled back but did not stop buying government debt. Even these moderate policy moves have clearly disrupted the status quo.

The situation bears close watching as Congress approaches the tax bill vote. Higher yields boost borrowing costs across the economy even though the Federal Reserve kept short-term rates steady.

Current data shows Japan’s 30-year bond yields reached their highest level on record at 3.197% while US 30-year yields broke above 5.00% for the first time since October 2023.

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