Sovereign Bond Yields Hit 2008 Highs! US and Japanese Bonds Break Key Levels—Why Is the Global Bond Market in Freefall?

The 10-year US Treasury yield surged past 4.78%, approaching the 5% mark, while the 10-year Japanese government bond yield touched 3% for the first time in 30 years—behind the breaking of key levels in the world's two benchmark government bonds is a concentrated eruption of macro pressures: persistently high global inflation, out-of-control fiscal deficits, and no hope of rate cuts in many countries. A 5% US Treasury yield may not be the end, but the beginning of a new normal.

The global bond market is experiencing its most violent sell-off in nearly two decades. The Bloomberg Global Government Bond Index yield has risen for four consecutive trading days to 3.72%, the highest level since mid-2008—this is not a localized fluctuation in a single market, but a systemic repricing sweeping across the US, Japan, Australia, and the entire G10.

On Tuesday (September 2), the US 10-year Treasury yield rose to 4.78%, the highest since January 2025; Japan's 10-year government bond yield touched 3% for the first time in 30 years, and Australia's same-maturity bond yield also rose to its highest since 2011. The UK 10-year government bond yield climbed to its highest level since June 2008, up 7 basis points to 5.223%.

The logic driving this sell-off is interlocking: Federal Reserve Governor Kevin Warsh reiterated his anti-inflation stance at the Jackson Hole symposium, the escalation of the US-Iran conflict pushed Brent crude back above $90 per barrel, and with US Treasury debt surpassing $40 trillion and fiscal deficits continuing to expand, the market's pricing of "higher for longer" interest rates is undergoing a comprehensive reassessment.

However, the more critical question is: the era of cheap money that has underpinned global asset pricing for over a decade may have come to an end. Analysts believe that a 5% US Treasury yield may not be the end, but the beginning of a new normal.

Trigger: Warsh's Hawkish Stance Combined with Oil Price Shock

The direct trigger for this sell-off is the simultaneous eruption of two forces.

In his speech at Jackson Hole last Friday, Warsh reiterated his stance to thoroughly suppress inflation—this is the fifth consecutive year that the Federal Reserve has failed to keep inflation within its target range. After the speech, the interest rate swap market's pricing probability for a Fed rate hike in September jumped from 34% to 65%.

At the same time, the US-Iran conflict escalated again, with markets worried about sustained disruption to the Strait of Hormuz energy corridor, pushing Brent crude prices up 1.2% to about $91.55 per barrel. Higher oil prices directly reinforced inflation expectations, further depressing bond prices.

According to Bloomberg, multiple current and former US and Iranian officials said they expect the Middle East conflict to last for months. This means upward pressure on energy prices is unlikely to dissipate in the short term, and uncertainty over the inflation path will continue to plague the bond market.

The combination of these two forces has sharply intensified pressure on the bond market. Barclays and Societe Generale both revised their interest rate forecasts after Warsh's speech, incorporating previously unexpected rate hikes in September and December into their baseline scenarios.

Core Logic for US Treasuries: Out-of-Control Deficits and Real Rate Repricing

The rise in US Treasury yields has deeper structural drivers than geopolitics.

US national debt surpassed $40 trillion in August, and supply pressure in the Treasury market continues to intensify. At the same time, large technology companies are issuing long-term corporate bonds on a massive scale to finance AI infrastructure construction, with an estimated $200 billion of high-grade corporate debt expected to flood the market in September, competing with Treasuries for the same pool of funds.

According to MarketWatch, US nominal GDP growth has accelerated to about 6.6% year-over-year, but real growth is only 2.1%, with the difference mainly reflecting inflation—the GDP deflator rose 4.4% year-over-year. Historically, the 10-year Treasury yield has typically been higher than the GDP deflator, but the current spread between the two is at a historical low, implying that yields still have room to rise.

More notably, this round of yield increases has been driven primarily by real rates (real yields) rather than inflation expectations. This indicates that the bond market is not simply pricing in inflation, but demanding higher real returns—a fundamental reassessment of the long-term equilibrium interest rate level for the US economy.

According to MarketWatch, nominal GDP growth is also faster than money supply growth, and the velocity of money is rising, which historically has been highly correlated with higher long-term interest rates.

According to reports, Treasury Secretary Bessent said on Monday that he and Warsh are aligned on the approximately $31.5 trillion Treasury market. The Treasury had previously announced in mid-August an expansion of buybacks for 10- to 30-year bonds, but analysts believe the authorities' current aim is merely to stabilize yields, not to actively push them down.

Global Central Bank Tightening Resonance: The Era of Cheap Money Is Ending

Another core logic of this bond sell-off is the end of the global era of cheap money.

For a long time, low US Treasury yields partly relied on sustained inflows of cheap foreign capital from low-interest-rate economies such as Japan and Europe. However, as major global central banks have successively tightened monetary policy, this logic is unraveling.

As overseas yields rise, the relative attractiveness of US Treasuries to foreign investors declines, especially after accounting for currency hedging costs, further increasing upward pressure on US yields. Bloomberg strategist Mark Cranfield noted:

"G10 fixed income traders are increasingly focusing on Japanese government bonds, and Australian bonds are also increasingly pricing off JGBs rather than US Treasuries. The current backdrop is extremely unfavorable: sticky inflation combined with massive fiscal deficits in the US, Japan, the UK, and France."

Japan's shift is particularly critical. The Bank of Japan ended the world's last negative interest rate policy in 2024, and since then Japanese government bond yields have risen rapidly. The 10-year JGB yield was only about 1.5% a year ago and has now touched 3%, doubling.

International investors' share in monthly spot trading of Japanese government bonds has risen from 12% in 2009 to about two-thirds, and JGBs are once again becoming an important option in global asset allocation, meaning some funds that previously flowed into US Treasuries are returning.

At the same time, fiscal pressure cannot be ignored. Japanese Prime Minister Takaichi Sanae's government has launched an unprecedented fiscal spending plan, but has not yet clarified the financing scheme for food consumption tax cuts, and concerns about fiscal sustainability have further pushed up JGB yields. In the initial budget request for the next fiscal year, Japan's Ministry of Finance has set a record debt servicing cost of 36.6 trillion yen (about $230 billion).

Rate Hike Expectations Surge Across US, Japan, Europe, Australia, and Other Central Banks

Amid the global bond market sell-off, the wave of global interest rate repricing continues to spread, and market bets on monetary tightening by major central banks have significantly intensified.

After the Jackson Hole global central bank symposium, according to Bloomberg data, the swap market's pricing probability for a Fed rate hike in September has surged from 34% before Warsh's speech to 65%.

In addition, interest rate swap markets show that a rate hike by the European Central Bank at its September 10 meeting is fully priced in, the probability of a rate hike by the Reserve Bank of New Zealand this week is 98%, the probability of a Bank of Japan rate hike on September 18 is 92%, and an October hike is fully priced in.

A Wall Street Journal article wrote that, according to Japan's national broadcaster NHK, US Treasury Secretary Bessent met separately with Japanese Finance Minister Satsuki Katayama and Bank of Japan Governor Kazuo Ueda during the G20 finance ministers' meeting on Monday. Bessent explicitly told both that Japan should raise interest rates next.

Subsequently, in an interview with CNBC, Bessent said: "I have information that the market does not know, and I believe the Japanese government and the Bank of Japan will take action to strengthen the yen." This is the clearest signal yet from Washington regarding Japan's monetary policy.

Pepperstone Group strategist Dilin Wu pointed out, "The policy paths of major global central banks will be revealed intensively within the same month, creating a highly dense pricing window for interest rate and foreign exchange markets."

Global Resonance: Chain Reactions from Australia to Europe

This sell-off has evolved into a global synchronized resonance, rather than an isolated event in a single market.

On Tuesday, Australia's 10-year government bond yield rose to its highest since 2011, after Australia released stronger-than-expected inflation data, prompting traders to increase bets on a fourth rate hike by the Reserve Bank of Australia this year, with the probability rising to 54%.

TD Securities Senior Asia-Pacific Rates Strategist Prashant Newnaha said:

"The bond market is not crashing, but it is sending a very clear memo: the stickier inflation is, the more policy rates need to be 'higher for longer.' Fiscal deterioration and higher term premiums will continue to be market focus."

From a seasonal perspective, pressure may persist. According to Bloomberg data, over the past decade, September and October have been the two worst months for global bond indices, with average monthly declines exceeding 1%.

Stocks Under Pressure, Borrowing Costs Rising Across the Board

The continued rise in yields is transmitting to the real economy and financial markets through multiple channels.

For stocks, Dakota Wealth Management Senior Portfolio Manager Robert Pavlik said:

A 10-year US Treasury yield of 4.75% is a level that makes investors "really start to get nervous," and the market is beginning to worry about yields hitting 5% and triggering a stock market correction.

Franklin Templeton Institute Chief Market Strategist Chris Galipeau said that the stock market can still withstand current interest rate levels, but if the 10-year yield breaks above 5%, stocks "could run into some trouble."

For ordinary households, the 10-year Treasury yield is the pricing benchmark for 30-year mortgage rates, and rising yields directly push up home buying costs.

MetLife Investment Management Chief Market Strategist Drew Matus pointed out that yields breaking out of the "comfort zone" of 3.5% to 4.5% will force households to increase savings, exerting downward pressure on consumption.

The 30-year US Treasury yield currently stands at 5.27%, and has closed above 5% for 55 trading days since January this year, the most since 2006. In mid-August, the 30-year yield briefly touched 5.34%, the highest since 2007.

Natixis Investment Managers Portfolio Strategist Garrett Melson warned that if yields rise further, it will exacerbate the multiple headwinds facing the stock market, especially against the backdrop of recent softening hard economic data. He said:

"Attractive real yields combined with a hint of slowing growth are enough to change the market narrative and rekindle buying demand for bonds."

The August non-farm payrolls report to be released this Friday will be the next key observation window.