While the most important updates to the global economy right now appear to be coming from a small town in the Swiss Alps, Tokyo may disagree. The Japanese bond market suffered a sharp sell-off this week, with yields hitting record highs.
The 10-year Treasury yield surged to 2.2%, while The 30-year Treasury bond yield reached 3.66%. While the timing of the start of the sell-off cannot be determined, it is likely the result of a combination of geopolitical tensions and concerns about Prime Minister Sanae Takaichi’s 21.3 trillion yen ($134 billion) economic plan to boost Japan’s debt-heavy economy.
Citadel CEO Ken Griffin warned that this should be a warning for the U.S., where yields are dangerously close to the 5% benchmark this week.
“I think there’s a clear warning that if your fiscal institutions are not sound, bond vigilantes may come out and withdraw their prices,” Griffin told a conference. Bloomberg Davos event.
The 5% threshold is what investors care about because at this point, returns from holding Treasury bonds are comparable to returns from stocks. This is a concern because bonds are viewed as a stable, low-risk component of a balanced portfolio—if the yield is comparable to stocks, the risk may also be too high for investors who want stability.
“What’s particularly troubling … is that when bond and stock prices move together, bonds cease to be a hedge against stock portfolios, and they lose a large part of what makes them special in constructing a portfolio,” Griffin said.
U.S. Treasuries have been rocked this week after President Trump announced over the weekend that a group of European countries would face additional tariffs if they do not support his bid to buy Greenland. The surge in yields comes as speculation mounts about how Europe and its investors will react, namely whether they will continue to hold U.S. debt.
The speculation has rattled Finance Minister Scott Bessant, who claimed Deutsche Bank’s chief executive called him personally to apologize for a report his institution released over the weekend that suggested European investors might vote with their feet in response to Trump’s threats. Deutsche Bank’s report is one of many suggesting the national debt could be used to resize Trump’s plans, including UBS’s Paul Donovan, who believes Uncle Sam’s deficit is America’s “Achilles’ heel.”
U.S. funding issues
While the recent change in yields is due to short-term foreign policy, it does expose broader issues regarding U.S. financing. Currently, the national debt exceeds $38 trillion, and in the last three months of fiscal year 2025 alone, the government paid more than $270 billion in interest on the debt. JPMorgan Chase Chief Executive Officer Jamie Dimon and Federal Reserve Chairman Jerome Powell are concerned not necessarily with the value of the nation’s debt but with its borrowing in relation to economic growth.
While some may argue that a debt crisis will never happen because the Fed can simply print more money (which is inherently inflationary), others worry that at some point investors will feel that the U.S. has reached a destabilizing spending threshold and demand higher returns as a result.
“If U.S. Treasuries are seen as at risk because of poor U.S. credit, then the prices of bonds and stocks will move in tandem. That will cause bonds to be demanded in the market at higher yields, so mortgage rates will be higher and it will be more expensive for us to finance the deficit,” Griffin said.
So far, investors appear relatively optimistic about the U.S. fiscal trajectory. Yields fell rapidly after President Trump re-engaged in TACO trade (Trump is always timid) and lifted the threat of tariffs on European countries. Likewise, interest rates on 30-year bonds are in the 4% to 5% range, consistent with the general trend over the past few years.
That confidence may not last forever, Griffin added. Although the United States is not “playing with fire” at the moment, he warned: “The United States has so much wealth that we can maintain this level of deficit spending for a while. But the longer we wait to change direction, the more severe the consequences of such a change will be.”
This story was originally published on wealth network