The global bond market is flashing red. Japan, once the planet’s anchor for low yields and fiscal restraint, is now drifting into dangerous territory. The country’s fiscal deficit widened to 3.6% of GDP in FY2024, up from 2.9% the year before. That’s despite the supposed phase-out of pandemic-era support. The Bank of Japan holds 52% of all outstanding Japanese government bonds. That’s not a typo. It’s a central bank swallowing its own debt to keep the illusion alive. Meanwhile, the Federal Reserve sits on roughly 30% of all outstanding U.S. Treasury bonds. These are not free lunches. They are ticking clocks.
Bond prices are collapsing under the weight of rising interest rates. Apple’s 2.55% bonds due in 2060 have been trading in the bid 50s for nearly three years. That’s cents on the dollar. Now ask yourself where the rest of the bonds issued between 2011 and 2021 are trading. The answer is trillions in losses. Insurance companies, pension funds, and banks are sitting on portfolios that look fine on paper but are bleeding in reality. The cost of capital is no longer artificial. It is being dragged back to earth by gravity.
Japan, government spending as a percentage of GDP – The fiscal deficit was projected to widen to 3.6% in FY2024 from 2.9% in FY2023, despite the “gradual phase-out of some economic support packages.”
*Central bankers have been financing (buying bonds) the masquerade for decades. pic.twitter.com/PHhabjBpH3
— Lawrence McDonald (@Convertbond) July 8, 2025
The U.S. deficit for 2024 hit 6.4% of GDP. That’s nearly double the 30-year average of 3.3%. Politicians have been conditioned to spend without consequence. Central bankers enabled it. They killed the natural cleaning process of the business cycle. They buried creative destruction. Now the market is starting to growl. The beast is awake.
Japan’s bond yields are climbing fast. The 40-year yield hit 3.385% in May. That’s the highest in decades. The 30-year yield touched 2.940%. The bid-to-cover ratio for Japan’s 40-year bond auction fell to 2.21, the weakest in a year. Domestic demand is fading. Inflation is rising. The BOJ is tapering. The carry trade is unwinding. Japanese investors are pulling capital back from the U.S. That’s a problem. Japan is the largest holder of U.S. debt, with $1.13 trillion in Treasuries. If they stop buying, or worse, start selling, the consequences will be global.
The Federal Reserve is facing the same dilemma. Bond yields are rising. The 30-year Treasury yield is now 4.92%. The 10-year sits at 4.38%. These are not temporary moves. They reflect a shift in how capital is priced. The Fed can’t hold the line forever. Liquidity is tightening. The cost of refinancing is climbing. The illusion is cracking.
The next chapter is unwritten. But the handwriting is already on the wall. The central banks are no longer magicians. They are exposed. The market is recalibrating. And the consequences will not be gentle.
Sources:
https://www.cnbc.com/2025/05/28/japan-government-bond-yields-spark-fears-of-carry-trade-unwind.html
https://www.cbo.gov/publication/60843/html
https://economicsinsider.com/top-15-largest-us-treasury-holders
