In our «GANÉ Express dated May 28, 2026», we strongly emphasized the ongoing risks in global bond markets: Soaring U.S. government debt, rapidly rising yields in Japan, the increasing risk of bankruptcy for energy-intensive companies, and the low likelihood of rapid interest rate cuts under Fed Chair Kevin Warsh—all of this has led us to maintain our risk-off stance on bonds.
In the interim, market pressure across global fixed income has continued to intensify. In Japan, medium- and long-term JGB yields surged alongside a severe depreciation of the yen, prompting joint currency interventions by the U.S. and the Bank of Japan. The benchmark 10-year U.S. Treasury yield climbed above 4.7%, while 20- and 30-year yields temporarily breached 5.3%—a sell-off so sharp that U.S. Treasury Secretary Scott Bessent moved to expand regular buybacks of long-dated Treasuries. Dislocations hit Europe as well, pushing 30-year German Bund yields well above 3.7%.
Despite the measures initiated by the U.S. administration, we see no reason for the global bond markets to breathe a sigh of relief. On the contrary, we remain cautious for the following reasons:
1. Soaring U.S. Sovereign Debt: Fiscal pressures in the U.S. continue to escalate as anticipated, with total national debt surpassing the $40 trillion threshold. Without the U.S. government implementing meaningful expenditure cuts, fixed income investors are demanding higher term premia for extending long-term credit to the U.S. Treasury. The “Bessent Maneuver” will do little to soothe skepticism surrounding U.S. fiscal sustainability: the Treasury doubled its buyback volume for long-dated Treasuries (10- to 30-year maturities) from $2 billion to at least $4 billion per operation. Unlike Quantitative Easing (QE), this does not involve printing new money; instead, it is potentially funded by expanded issuance of short-term T-bills. Effectively, the U.S. Treasury is borrowing short to buy long, capping yield spikes at the long end of the curve. Because the aggregate debt load remains unchanged and merely shifts the maturity profile, the underlying structural risk remains unaddressed. Furthermore, short-dated paper requires far more frequent refinancing, making the impact of potential rate hikes or higher-for-longer policy rates far more immediate and painful.
2. Selling Pressure from Japan: Given Japan’s heavy reliance on U.S. dollar-denominated energy and commodity imports, the surge in energy prices driven by the ongoing Middle East conflict exerted renewed downward pressure on the yen against the greenback. With a national debt load hovering around 250% of GDP, the Bank of Japan lacks the leeway for aggressive rate hikes to defend its currency. As the largest foreign holder of U.S. Treasuries (over $1.1 trillion), selling Treasury reserves remains an option for Japan to fund currency support. In late July, the U.S. Treasury intervened alongside Tokyo in a coordinated action, citing regional stability risks stemming from the weak yen. To support the currency, the U.S. Exchange Stabilization Fund (ESF) sold euro reserves to purchase an estimated $5 billion to $10 billion worth of yen. In addition, Washington expanded access to the Foreign and International Monetary Authorities (FIMA) Repo Facility, allowing Japan to temporarily post larger amounts of Treasuries as collateral to raise U.S. dollars for yen purchases. Though the Japanese Ministry of Finance deployed an estimated $75 billion, market impact faded quickly as the underlying structural imbalances remain unresolved.
3. Liquidity Drain Driven by the AI Boom: With tech megacaps’ free cash flows falling short of the capital expenditures required for AI infrastructure, corporate expansion is increasingly funded via debt markets. According to Goldman Sachs, over $400 billion in investment-grade (IG) issuance year-to-date is linked to the broader AI ecosystem, with over $190 billion originating from major hyperscalers alone. Over the summer, Nvidia ($25bn), Amazon ($25bn), and SpaceX ($25bn via High Yield) raised enormous sums on the bond market. Despite some risky financing structures and circular transactions, the euphoria surrounding AI infrastructure expansion continues to draw massive amounts of liquidity from the broader corporate bond market.
4. Mispriced Credit Spreads: The yield differential between high-yield corporate bonds and risk-free government paper — known as credit spreads — remains too tight. Default risks are not adequately reflected, given the conflict in the Middle East and high energy prices. Energy-intensive industrial companies in Europe, in particular, face structurally rising default rates, a fact that is currently being largely ignored by the credit markets.
5. Reduced Fed Transparency: Kevin Warsh’s tenure marks a structural shift in U.S. monetary policy. Breaking with his predecessors, he abruptly eliminated forward guidance and pointedly declined to submit an individual dot for the Fed’s “dot plot.” The idea is that the Fed should once again act in a more flexible, dynamic, and unpredictable manner. Market participants will have to rely more heavily on their own macroeconomic analyses, which will lead to persistently higher volatility in the interest rate market.
Uncertainty across fixed income markets has increased further in recent weeks. Consequently, we remain focused on the security of reliable coupon payments, short maturities, and minimal interest rate risk.
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