The global government bond sell-off has spread to Japan, with the 40-year government bond yield rising to its highest level since 2007

According to the Zhitong Finance APP, in the context of a rare wave of selling in the global government bond market and expectations that the Bank of Japan will continue to raise interest rates in the coming months, the yield on Japan's long-term government bonds has been rising since the beginning of 2025. The 40-year Japanese government bond yield has reached a historic high, soaring to the highest level since its first issuance in 2007.

During Tuesday's Asian trading session, the yield on the 40-year Japanese government bond rose by 3 basis points to 2.755%, marking the highest level since the Japanese government first issued this long-term sovereign bond in 2007. After a public holiday on Monday, the Japanese government bond and stock trading markets reopened this morning, and the yield on the 20-year Japanese government bond also surged, continuing the upward trend that has persisted since the beginning of 2025, now reaching the highest level since May 2011.

Concerns about the return of the "inflation beast" in the U.S. market, along with the increasing U.S. fiscal deficit driven by substantial debt interest payments and social spending, have led to a continuous surge in the yield on the 10-year U.S. Treasury bonds, known as the "anchor of global asset pricing," since Trump's victory in November. On Monday, Eastern Time, it even briefly touched 4.8%, reaching the highest level since October 2023. This wave of government bond selling has spread to the global bond trading market, causing sovereign bond yields worldwide to rise, with the UK and Japan being significantly affected by the "spillover effect" of U.S. Treasury bonds.

Last week's global headlines primarily focused on the persistently strong economic data from the U.S., prompting the market to reassess inflation expectations and the prospects for Federal Reserve interest rate cuts. Wall Street investment institutions, including Bank of America, have even begun pricing in the possibility that the Federal Reserve will not cut rates throughout 2025. This hawkish market expectation, combined with the increasingly large interest payments on U.S. debt and the new Trump administration's core economic growth and protectionist policies of "domestic tax cuts + external tariffs," may force the U.S. Treasury's bond issuance scale to expand even more than the Biden administration's excessive spending during the "Trump 2.0 era," leading to significant selling in the bond market.

After the Federal Reserve shifted to a hawkish stance in December, the "higher for longer" narrative has returned to the forefront, prompting the market to begin pricing in the possibility of no rate cuts in 2025 and a continued upward trend in neutral interest rate expectations. More importantly, the logic suggests that the Trump 2.0 era may accelerate inflation and the scale of government bond issuance and federal budget deficits, compounded by the refusal of major U.S. Treasury bond holders like China and Japan to expand their holdings, with the possibility of significant reductions in U.S. Treasury holdings. Investors in U.S. Treasury bonds are increasingly concerned that the Treasury, which has been issuing bonds in large quantities in recent years, may struggle to repay the increasingly high interest payments in the future, thus pricing in higher long-term U.S. Treasury yields.

"The rapid rise in long-term Japanese government bond yields has reached the highest level in years," said Yoshiki Omori, chief Japan market strategist at Mizuho Securities in Tokyo. "With the yields on long-term U.S. Treasury bonds rising and expectations for interest rate hikes from the Bank of Japan, there is further room for the yields on long-term Japanese government bonds to rise." Investors in the Japanese government bond market are almost all preparing for the potential continued interest rate hikes by the Bank of Japan in the coming months. Bank of Japan Governor Kazuo Ueda stated in an important speech last week that he would support a rapid increase in the benchmark interest rate if Japan's economy continues to improve this year and if inflation and wage growth remain healthy, but he did not provide any specific hints about the timing of the next rate hike.

Pricing in the Japanese market's overnight index swaps shows a 59% probability of an interest rate hike being announced at next week's Bank of Japan meeting, with the likelihood of a rate hike by March rising to 84%. Bank of Japan Deputy Governor Ryozo Himino stated during a speech in Kanagawa on Tuesday that Bank of Japan members will discuss whether to raise rates this month, but acknowledged various risks both domestically and internationally, particularly those related to yen arbitrage trading, which has also weakened market expectations for a rate hike in January, although bets remain that the Bank of Japan will raise rates by at least 50 basis points this year.

In the increasingly divided era of "de-globalization," the market is betting that the significantly expanding U.S. fiscal spending, dominated by massive U.S. Treasury interest, military defense, and domestic livelihoods, will embark on a path of substantial expansion. Concerns about the sustainability of the U.S. government's growing debt and long-term inflation risks have significantly intensified, leading to a resurgence of the "term premium" that sends shivers through financial markets, with the "anchor of global asset pricing" gearing up to surge towards 5%