Japan was the world’s bond yield anchor. For decades it absorbed market shocks by suppressing its own cost of capital. That anchor just slipped. The fiscal deficit in Japan widened to 3.6% in FY2024, up from 2.9% the year before. This comes despite phase-outs of pandemic-era subsidies. The Bank of Japan now holds 52% of all outstanding government bonds. That’s according to Lawrence McDonald, former Lehman VP and founder of The Bear Traps Report.
Bond prices are collapsing under the weight of rising interest rates. Apple’s 2.55% bonds due in 2060 have been trading in the bid 50s for nearly three years. That’s cents on the dollar. Now ask yourself where the rest of the bonds issued between 2011 and 2021 are trading. The answer is trillions in losses. Insurance companies, pension funds, and banks are sitting on portfolios that look fine on paper but are bleeding in reality. The cost of capital is no longer artificial. It is being dragged back to earth by gravity.
Japan, government spending as a percentage of GDP – The fiscal deficit was projected to widen to 3.6% in FY2024 from 2.9% in FY2023, despite the “gradual phase-out of some economic support packages.”
*Central bankers have been financing (buying bonds) the masquerade for decades. pic.twitter.com/PHhabjBpH3
— Lawrence McDonald (@Convertbond) July 8, 2025
The U.S. deficit for 2024 hit 6.4% of GDP. That’s nearly double the 30-year average of 3.3%. Politicians have been conditioned to spend without consequence. Central bankers enabled it. They killed the natural cleaning process of the business cycle. They buried creative destruction. Now the market is starting to growl. The beast is awake.
Japan’s bond yields are climbing fast. The 40-year yield hit 3.385% in May. That’s the highest in decades. The 30-year yield touched 2.940%. The bid-to-cover ratio for Japan’s 40-year bond auction fell to 2.21, the weakest in a year. Domestic demand is fading. Inflation is rising. The BOJ is tapering. The carry trade is unwinding. Japanese investors are pulling capital back from the U.S. That’s a problem. Japan is the largest holder of U.S. debt, with $1.13 trillion in Treasuries. If they stop buying, or worse, start selling, the consequences will be global.
🍿 POPCORN ALERT 🍿 https://t.co/dhGRYxRiev pic.twitter.com/E8lHJuD8XT
— JustDario 🏊♂️ (@DarioCpx) July 8, 2025
The Federal Reserve is facing the same dilemma. Bond yields are rising. The 30-year Treasury yield is now 4.92%. The 10-year sits at 4.38%. These are not temporary moves. They reflect a shift in how capital is priced. The Fed can’t hold the line forever. Liquidity is tightening. The cost of refinancing is climbing. The illusion is cracking.
The next chapter is unwritten. But the handwriting is already on the wall. The central banks are no longer magicians. They are exposed. The market is recalibrating. And the consequences will not be gentle.
Sources:
https://www.cnbc.com/2025/05/28/japan-government-bond-yields-spark-fears-of-carry-trade-unwind.html
https://www.cbo.gov/publication/60843/html
https://economicsinsider.com/top-15-largest-us-treasury-holders
