Do Bond Investors Have Reason to Worry? Markets Indicate They Do…

The debate over where the bond market, or debt market, is heading has intensified in international financial media due to analyses, particularly from major investment banks, which are sounding the alarm more frequently in recent hours. The main cause of this growing concern is the recurring fact that large auctions, especially for medium- to long-term bonds in high-debt economies (USA, Japan, etc.), are showing a mismatch between supply and demand compared to the calmer past. The result is falling prices, rising yields, and even when corrections occur, yields remain high. Worse still, when selling difficulties intensify, central banks (e.g., BoJ, Fed) are forced to intervene to prevent accidents. Let’s take a step back to better understand what’s happening and why. For years, especially since the 1980s but much more so in recent decades, globalization in capital, goods, and services movement created a flow of capital and goods centered on Eurozone and Asian economies with large trade surpluses, and the USA as the recipient with a large trade deficit. This surplus did not return to the source countries but instead flowed into investments, primarily in U.S. markets—more specifically into the bond market. These investments were further fueled by financing from Europe, but mainly Japan, which supplied capital flows via carry trades to Wall Street and U.S. bonds due to negative interest rates and cheap yen. Intervening events like the 2008 crash, the pandemic, and inflation didn’t reverse this debt-production process but multiplied it, resulting in the U.S. consistently running annual deficits between 6% and 7% of GDP. Trump’s arrival at the White House and the launch of efforts to correct this massive debt growth through tariff wars broke the chain of capital flows underpinning the unchecked production of U.S. debt. It disrupted ‘capital conveyor belts,’ fragmenting trade flows and reversing transactions. Adding to this fragmentation, the Trump administration proposed a budget that further fueled existing debt issues, sparking doubts about the structural element of this debt-production process. Questions arose about whether American—and consequently Japanese or other—debt remains ‘safe’ and profitable. Moody’s recent intervention added fuel to the fire, stating that U.S. debt might no longer be as good as previously thought. Consequently, in major auctions in the U.S., Japan, and Germany, demand for long-term bonds has become more cautious while supply increases due to deficits. Naturally, bond prices are slipping, and yields are rising, making debt servicing costlier and increasing fiscal deficits. This cycle continues, worsening the debt situation—a lesson Greece knows too well. The question now is: What happens next? According to Bloomberg, traders disturbed by the decline in long-term U.S. bonds believe things will worsen as yields remain near the psychologically troubling 5% threshold.