Japan 30-Year Bond Yield Hits Record 4.17% as Inflation Fears Roil Markets

10-year yield also climbs above 2.7%

Markets increasingly price in a near-term rate hike

Disappointment with the outcome of the Trump-Xi meeting, which produced no breakthrough on the Iran war, shifted market focus to rising oil prices and inflation, fueling a global bond selloff. On May 18, selling in Japanese government bonds intensified, pushing yields to record highs.

Japan’s 30-year government bond yield rose to 4.17% on May 18, the highest level since the 30-year bond was first issued in 1999. The 10-year yield also traded near a roughly 29-year high at 2.72%. Bond prices and yields move in opposite directions.

The move reflected expectations that Japanese authorities could raise interest rates sooner as oil-driven inflation builds and there are still no signs of easing tensions in the Middle East.

Calls by Japanese Prime Minister Sanae Takaichi for a supplementary budget to address higher raw-material costs tied to the Middle East war also helped drive ultra-long yields to fresh records. Takaichi and Finance Minister Satsuki Katayama had argued for weeks that additional funding or new bond issuance would not be necessary, but later reversed that position.

At a meeting of the ruling coalition on May 18, Takaichi said she had asked Finance Minister Katayama last week to review ways to secure fiscal resources, including a supplementary budget.

Reuters, citing an unidentified Japanese government official, reported that the government will probably issue new bonds to finance part of the extra budget.

Higher long-term Japanese government bond yields point to the possibility of policy-rate increases, which could weigh on the stock market.

Japan has also faced pressure from US Treasury Secretary Scott Bessent to respond more aggressively to inflation as price pressures coincide with yen weakness.

Takaichi favors lower interest rates. Even before the Iran war, she had sought to curb yen weakness driven by inflation pressures through foreign-exchange intervention, though with limited effect. Japan also cannot easily ignore continuing US calls for rate hikes, as Washington is uncomfortable with the yen’s weakness.

Brent crude futures for July delivery climbed above $110 a barrel on May 18. West Texas Intermediate crude futures for June delivery traded at $106.54 a barrel.

Bloomberg interpreted the sharp rise in Japan’s long-term bond yields as a sign of a growing inflation risk premium. Investors had already been pricing in a range of inflationary factors that could erode the real value of bonds, including higher oil prices, Takaichi’s supplementary budget plan to respond to rising raw-material costs and doubts about the Bank of Japan’s independence.

In South Korea’s bond market, government bond yields ended mixed by maturity on May 18. Long-term and ultra-long yields remained near their highest levels in about two and a half years, amid persistently high oil prices tied to Middle East risks and expectations that the incoming Bank of Korea governor may take a hawkish stance.

Meanwhile, the 30-year US Treasury yield rose 4 basis points to 5.16% late last week as oil prices kept climbing after the Trump-Xi meeting. That was the highest level since October 2023.

The 10-year Treasury yield rose to 4.63% and the 2-year yield climbed to 4.10%, also the highest levels since February 2025.

In Asian and European trading on May 18, the rise in Treasury yields moderated somewhat, with yields hovering near the previous session’s levels.

The surge in sovereign bond yields around the world was driven primarily by inflation fears, which triggered selling in government debt. Markets expect central banks, including the Federal Reserve, to keep rates elevated as energy prices jump on concerns over a closure of the Strait of Hormuz.

Guneet Dhingra, head of US rates strategy at BNP Paribas, said the bank had advised clients to target a 30-year Treasury yield range of 5.25% to 5.5%.

Ed Yardeni, president of Yardeni Research and the firm’s chief investment strategist, said the Fed should abandon its dovish policy stance at its June meeting. Otherwise, investors may conclude the central bank is failing to respond adequately to inflation and demand an additional inflation premium.

He added that if the Fed shows signs of moving toward easier monetary policy, so-called bond vigilantes may reemerge. Bond vigilantes have historically pushed yields higher by selling bonds in protest against government policies seen as inflationary, acting as a market check on loose monetary policy.

Kim Jung-a, guest reporter, Hankyung.com, kja@hankyung.com