When safe isn’t safe: Why US and Japanese bond yields are surging 

Published on 16.06.2025

Yields on long-term government bonds have surged to levels not seen in over 15 years, shaking assumptions about what counts as ‘safe’ in the global financial system. In the US, the 30-year Treasury yield hit 5%, and the 10-year climbed to 4.5%, heights last reached before the 2008 financial crisis. Across the Pacific, Japanese 10-year yields rose to 1.575%, while 30- and 40-year yields jumped past 2.8%, triggering alarm in a market known for its stability.

So, what is going on? And why are bonds, the very instruments investors rely on for safety, now flashing warning signals?

Why US Treasury Yields are surging

US Treasury yields (the returns investors demand to lend money to the government) have surged, driven by American political volatility and doubts about the long-term credibility of US economic policy.

Moody’s rating

On 16 May, amid concerns over the nation’s escalating debt and rising interest costs, Moody’s cut its outlook on the US government’s credit rating from stable to negative, a warning that a future downgrade was now even more likely.

Though Moody’s maintained the top-tier AAA rating, indicating that the US government is extremely low risk, its message was clear:

• the ballooning Federal deficit projected to exceed $1.8 trillion this year and
• mounting national debt above $34 trillion

are both eroding investor confidence.

Political uncertainty

Political risk added fuel to the fire on 23 May, when President Donald Trump floated the idea of a 50% tariff on EU imports — a move later walked back on 25 May, but not before spooking markets by amplifying fears of imported inflation (when the cost of imported goods rises, pushing up prices at home).

All this came amid ongoing congressional gridlock over the debt ceiling, and uncertainty surrounding the renewal of tax policy dating back to 2017: all of which came together to deepen concern over the US’s fiscal direction.

The result: a steepening yield curve between short-term and long-term bond yields, as long-term bond yields spiked. This shift suggests that investors are starting to question the US’s long-term economic and fiscal trajectory.

The reputation of US treasury bonds

Traditionally, US Treasuries have been considered among the safest assets in the world, backed by:

• The full faith and credit of the US government (its long-standing reputation for always repaying debts)
• High liquidity
• Its status as the global benchmark for risk-free returns

But now, investors are demanding higher compensation to hold these bonds, signaling a shift in how even the most established assets are perceived.

Adding to the unease, the US dollar has weakened against other major currencies by 10.8% from mid-January to 21 April 2025 on the DXY — another sign that trust in American financial leadership may be softening.

Why Japanese Bonds are surging

Japan's bond market — long one of the most stable in the world — is also showing signs of stress.

Interest rates

For decades, Japan maintained ultra-low interest rates since the 1990s, adopting a zero-interest rate policy in 1999, and introducing a negative interest rate policy in 2016 to fight deflation and stimulate growth. The result was a bond market known for predictability and calm. But that’s changing.

Inflation is finally gaining traction in Japan at 3.5%, up from 3.2% in March and 3.0% in February. Markets are now expecting that the Bank of Japan may be forced to pivot, either by:

• raising rates by 25 basis points to 0.75%, or
• tightening its ultra-loose policy stance set at 0.5% from -0.1%

This has led to a sell-off in long-term Japanese government bonds (JGBs), pushing yields to multi-decade highs. Specifically, the 10-year JGB yield rose to 1.575%, while 30- and 40-year yields surged to 2.495% and 2.845% respectively — levels not seen since 2008.

Government bond auction

The situation worsened when a government bond auction drew unusually weak demand, with the bid-to-cover ratio falling to 2.21, down from 2.92 in March, the lowest level since July 2024, shaking confidence further. A potential reduction in bond issuance later helped cool yields slightly, but the underlying shift remains.

The reputation of Japanese bonds

Traditionally, Japanese bonds were seen as a rock-solid safe haven, particularly during global downturns. Their predictability and the Bank of Japan’s consistently low interest rate policy made them a defensive asset for global investors. That perception is now at risk.

Conclusion: A global wake-up call on ‘Safe Assets’ 

This week’s bond market moves reflect more than just temporary volatility — they signal a deeper shift in how markets define and price risk. US and Japanese government bonds, once considered the cornerstones of safe investing, are now behaving more like risk assets.

This is a wake-up call: safety in financial markets is no longer a given. For investors, it means reassessing assumptions and asking hard questions.

Can these assets still be considered safe? Or are we entering a new era where even the most traditional havens must earn that label all over again?