Why trouble for the biggest foreign buyer of U.S. debt could ripple through America’s bond market

Core Insights - Recent developments in Japan's government, particularly under Prime Minister Sanae Takaichi, have led to increased long-dated yields on Japanese government bonds and a depreciation of the yen, which may impact U.S. financial markets [2][4]. Group 1: Japanese Government Bond Market - Aggressive fiscal stimulus measures by Japan's government have resulted in a spike in long-dated yields, with the 10-year yield surpassing 1.78%, the highest in over 17 years, and the 40-year yield reaching an all-time high above 3.7% [2][4]. - The situation in Japan is drawing comparisons to the U.K. crisis in late 2022, which was triggered by unfunded tax cuts, indicating a potential loss of confidence in fiscal policy [2]. Group 2: U.S. Financial Market Implications - The U.S. is facing challenges in managing interest payment costs due to a national debt exceeding $38 trillion, which is influencing the administration's efforts to lower long-term Treasury yields [3]. - Recent U.S. Treasury yields for 2-year and 10-year bonds have reached their lowest levels in three weeks, at 3.51% and nearly 4.06%, respectively, indicating a potential limit on how low U.S. yields can go in light of Japanese developments [5][6]. - The correlation between U.S. Treasury yields and Japanese government bond yields may not be direct, but there is a concern that U.S. yields could rise alongside Japan's, affecting borrowing rates for households and businesses [4][6].