Weekly Securities Newsletter: Rising Volatility in the Bond Market
Rising Volatility in the Bond Market
Chart of the Week:
Global Debt Levels Under Scrutiny as Long-Term Yields Surge; U.S. Government Relies More on Short-Term Debt
The results of ultra-long bond auctions in the U.S. and Japan have fallen short of expectations, mainly due to investor concerns over the continued rise in debt levels and doubts about governments’ ability to manage large fiscal deficits amid rising inflation risks. This is not limited to the U.S. and Japan, other developed economies face similar challenges, with long-term interest rates rising sharply over the past few years.
Market Recap 1:
Appeals Court Pauses Ruling Nullifying Tariffs; Tariffs Still Valid as NVIDIA Boosts U.S. Stocks
Regarding former President Trump’s tariff policy, a significant development occurred in the latter half of last week. The U.S. Federal Appeals Court has stayed the prior decision by the Court of International Trade that invalidated Trump-era tariffs. The appeals court is currently reviewing the Trump administration’s case, meaning that tariffs imposed under the International Emergency Economic Powers Act (IEEPA) are temporarily back in effect.
Market Recap 2:
Fed Minutes Reflect Cautious Stance; Tokyo Core CPI Beats Prior Reading and Expectations
U.S. GDP in Q1 2025 contracted at an annualized pace of 0.2% in its final estimate, a slight upward revision from the initial 0.3% decline. The adjustment was mainly due to stronger-than-expected fixed asset investment, which offset weak consumer spending and the drag from front-loaded imports.
What’s Trending:
Japan’s Resilient Inflation Heightens Risk of Long-Term Yield Increases
On May 28, the auction of Japan’s 40-year government bonds underperformed, further raising concerns over long-dated Japanese debt. Previously, Shigeru Ishiba remarked that Japan’s fiscal condition is “worse than Greece’s.”
In Focus 1:
Post-Tightening Volatility Rises in Bond Markets; Ultra-Long-Dated Bonds Hit Hardest
Since the Federal Reserve began tightening monetary policy in 2022, it has reduced its holdings of U.S. Treasuries, with domestic and foreign institutions and households stepping in as buyers. These investors are more sensitive to market signals and tend to demand higher yields when concerns over fiscal deterioration emerge. They also have more alternatives, such as investment-grade corporate bonds or other sovereign bonds. As long-term interest rates in other developed markets rise and the U.S. dollar outlook grows increasingly uncertain, investors willing to hold long-duration bonds now have a broader set of options.
In Focus 2:
A 30-Year Perspective: Short-Term Bonds for Parking, Medium-to-Long-Term for Positioning, Ultra-Long-Term for Trading
Over the past 30 years, U.S. interest rates have evolved from moderate levels in the 1990s, through multiple sharp rate cuts during the early 2000s tech bubble burst and the global financial crisis. The Fed kept rates low throughout the 2010s before gradually hiking them, only to slash rates to zero during the 2020 pandemic. Since 2022, inflation pressures led the Fed to raise rates again, with the current upper bound reaching approximately 4.5%.
