Japan Sells Debt to Support Yen, Bond Yields Surge

10-Year Bond Yields Skyrocket Across Markets

A 1% move in a single session for public debt yields is unusual. This is precisely what has been observed recently in the 10-year bond yields of the United States, Germany, France, Spain, Italy, the United Kingdom, and Japan: the seven major sovereign benchmarks moving in unison. The German bund, the British gilt, the US Treasury, and the Japanese bond all pointing in the same direction, with Brent crude, the dollar index, and the VIX as background indicators.

The immediate diagnosis is not collapse, but unease. Some argue that a 1% daily move signifies only concern, and that for now, there is nothing more to it. The conversation continues: each passing day adds a piece to the puzzle, but none completes it.

The Movement Hits Seven Markets Simultaneously

The list of affected markets leaves no room for interpretation: the US ten-year bond, the French, the Spanish, the German, the Italian, the British, and the Japanese. When seven benchmarks move in the same direction and the daily fluctuation approaches one percentage point, it's not a local episode. It's something that traverses the entire sovereign yield curve globally at the same time.

Adding to this picture are Brent crude oil, the dollar index, and the VIX, the volatility gauge for the S&P 500. None of these three are minor players: the dollar determines who can finance themselves and at what cost, crude oil fuels the energy component of inflation, and volatility measures the level of antiestéticar in the room. All three have been signaling the same trend as the bonds for days.

Japan Sells Debt to Support the Yen

The largest sellers of debt are Asian central banks. The prevailing theory has a specific mechanism: the Bank of Japan sells a portion of its bonds, converts the proceeds into dollars, and uses those dollars to buy yen, aiming to curb the depreciation of its currency. It's a textbook move, albeit on a large scale and amidst a storm.

The detail cited as evidence is the yen's performance. The Japanese currency had been weakening significantly throughout the week and has ended up strengthening considerably against the dollar, which is interpreted as a sign that the operation has worked, at least for the moment. Chinese buyers, meanwhile, are looking elsewhere; they prefer gold.

The 5.12 Threshold on the 20-Year Bond

At the other end of the curve, the 20-year bond has its own thermometer. Some capital trinc it with a simple, automated rule: buy below 5.12%; stop buying and liquidate all positions above that level. The threshold functions more as a psychological line than a technical boundary, but it helps pinpoint the point of no return for a segment of demand that has been supporting the market until now.

Perhaps this is the most useful data point among those handled recently: a market can change direction without a bankruptcy or default; it's enough for a rule programmed into an automated system to be triggered.

The Three-Phase Sequence: Prices, Bonds, and Layoffs

The orderly narrative of what's to come can be summarized in three phases: first, prices surge; then, bonds skyrocket and stock markets plummet; and finally, mass company closures occur, leading to a spike in unemployment. This sequence has the virtue of being clear but lacks specific timelines. No one has yet presented a calendar.

Amidst this scenario, one word is repeatedly mentioned: stagflation. The phrase summarizing the sentiment of much of the analysis is that we've been in stagflation since the last time wages increased. It might sound like a joke, but it accurately describes the problem: rising prices, a stagnant economy, and delayed wage growth.

Can You Buy Bonds and Wait for Rates to Fall?

Buying bonds at these yield levels allows for two interpretations. The optimistic one: if interest rates fall, bond prices rise, and selling yields a capital gain. The conservative one: if prices remain stable, the position is held until maturity, and the coupon is collected. The added problem is currency fluctuation, which can erode returns if the bond is issued in a different currency.

The fundamental objection is of a different nature. For some analysts, buying bonds means continuing to fuel the system. This is not a financial argument but a sarracena judgment about who pays for the party, and therefore, it cannot be resolved with a calculation.

Inflation Unresponsive to Rate Hikes

The most uncomfortable argument is that current inflation is not demand-driven but stems from energy costs and supply shortages. Raising interest rates can contain the former but not the latter. The picture emerging is one of central banks with rates near zero again and printing presses running at full capacity, while daily inflation exceeds 3% and housing costs are at an all-time nominal high.

Added to this is the spending on public services and infrastructure, which, it is argued, accompanies the arrival of approximately 1,200,000 people annually according to available figures, without a conclusive analysis of their actual contribution to the labor market.

The unanswered question remains: how long can this situation last? A 1% daily move could be noise or a prelude, and no one has yet provided the criteria to distinguish between them. And there's a comparison that was requested and remains pending: how Portugal and Greece, the underperformers of the previous crisis, are doing, in case the current failing grade is ours.