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

10-year yield also tops 2.7%

Early rate hike bets gain traction

Disappointment over the Trump-Xi meeting, which produced no tangible outcome on the Iran war, shifted investor focus to rising oil prices and inflation, fueling a global bond selloff. On May 18, selling in Japanese government bonds accelerated, sending yields to record highs.

Japan’s 30-year government bond yield rose to 4.17% on May 18, the highest level since the tenor 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 rise reflected expectations that Japanese authorities could move up an interest-rate increase as higher oil prices fan inflation and there are 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 caused by the Middle East war also helped drive super-long yields to record highs. 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 ruling coalition meeting on May 18, Takaichi said she had asked Katayama last week to review ways to secure funding, 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 signal a possible increase in the policy rate, a move that could weigh on the stock market.

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

Takaichi favors lower interest rates. Even before the Iran war, she had tried to curb yen weakness caused by inflation pressures through intervention in the foreign-exchange market, though with limited effect. She is also finding it hard to ignore continued US calls for higher rates as Washington remains uncomfortable with the weak yen.

International benchmark Brent crude futures for July delivery rose above $110 a barrel on May 18. US West Texas Intermediate crude futures for June delivery were trading at $106.54 a barrel.

Bloomberg interpreted the sharp rise in Japan’s long-term bond yields as a sign that the inflation risk premium is increasing. Investors have already priced in several inflationary factors that could erode the real value of bonds, including higher oil prices, Takaichi’s supplementary budget plan to address rising raw-material costs, and doubts over the Bank of Japan’s independence.

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

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

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

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

The jump in sovereign bond yields around the world was driven initially by a bond selloff sparked by concern over accelerating inflation. Markets expect central banks, including the Federal Reserve, to keep interest rates elevated as energy prices surge on the prospect of a closure of the Strait of Hormuz.

Guneet Dhingra, head of US rates strategy at BNP Paribas, said he 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 properly 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 could reemerge. Bond vigilantes have historically pushed yields higher by selling bonds in protest of government policies seen as fueling inflation, thereby checking looser monetary policy.

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