May 25, 2025

I recently learned that long-end interest rates are on the rise after a period of being unusually low compared to short-end rates. Even Japan’s market movements seem less alarming when considering the underlying fundamentals. This shift is making it more costly for governments to secure fixed interest rates on longer-term debts, particularly in Japanese Government Bonds.

In Japan, ultra-long-term yields have been spiking due to surging far-forward interest rates. This has led to a collapse in bond market functioning, with some off-the-run issues trading significantly higher. The recent chaotic moves are partly justified by changes in Japanese economic fundamentals, showing growth in nominal income, NGDP, and consumer prices.

Japanese wage growth has also seen an uptick, with negotiated pay increases between employers and the Japanese Trade Union Confederation reaching levels not seen since 1991. The Bank of Japan (BOJ) has been adjusting its policies to reflect these changes, lifting caps on yields and raising short-term interest rates to align with the evolving economic landscape.

In the US, Congress is considering a budget plan that would cut spending on health benefits, food aid, and green energy subsidies while increasing taxes on research universities. The plan is projected to be contractionary relative to the current fiscal stance, despite debates over the federal deficit and debt stock implications.

The bond market reactions to these developments, particularly the rise in US bond yields, indicate other influencing factors at play. While concerns about deficit impacts are present, the overall economic landscape and policy shifts are driving the current market movements. The challenge lies in managing the transition to a new world of faster growth and higher yields amidst evolving economic conditions.

Stay Well!