July fourteenth, two thousand twenty-five
《Bonds, Budgets, and the Search for Value》
“From Fiscal Policy to the Bond Market: Choosing Value Again”
Preface: Japanese government bond yields surge to levels not seen in decades... The 20-year Japanese government bond has risen to a level not seen since 2000, while long-term government bonds have swung sharply, setting off a historic selloff.
Chart: Japan’s 30-year government bond yield is rapidly approaching a record high
Global bond markets are coming back to life. Japanese 30-year government bond yields are again nearing new highs, while U.S. 30-year Treasury yields are once again approaching the 5% mark.Record highs in U.S. stocks, gold, and Bitcoin reflect a more structural trend:Global capital is gradually shifting toward numerous alternatives that are similar yet distinct. This is a renewed search for stores of value:
Chart: Bitco has broken above 120k
We are now in an era of heightened fiscal concerns and repricing of long-term rates.
In fact, judging only from supply, demand, and issuance volumes, bond-market volatility has clearly exceeded what current fundamentals would suggest, The market is clearly applying another force to the long end—namely, a rise in the so-called fiscal risk premium—to reflect long-term concerns about sovereign fiscal sustainability.
The best way to understand the unusual movements at the long end of the bond market under fiscal dominance
is to compare the 5-year real yield with the 30-year nominal yield:
Chart: U.S. 5-year real yield and 30-year nominal yield
The basic logic is very clear:
1) The effective tariff rate will most likely settle at around 20%, while the dollar has fallen by about 10% from its previous level. This means the inflation risk premium will remain elevated...
2) Core inflation is currently above the Fed’s target, while Trump is likely to appoint a dovish Fed chair and shift the entire FOMC toward a more accommodative stance, driving the term premium higher...
3) The U.S. currently has a primary fiscal deficit of 3.6%, and the recently passed tax-cut bill will push the deficit even higher. Fiscal expansion is clearly far from over...
Against this backdrop, short-term rates may be anchored at a low level by a new dovish Fed chair. How much of a premium should the 30-year yield reflect above that level? That is the core question behind the bond market’s current repricing.
Fiscal dominance refers to a fiscal authority running persistent deficits to stimulate nominal growth,
while the central bank does not offset this expansionary spending through policy measures such as raising interest rates.
The result is that, inflation expectations keep rising, but with a dovish central bank holding down front-end rates (5-year real rates remain low), market repricing can only occur through a rapid rise in 30-year nominal yields (or depreciation of the domestic currency).
We have discussed fiscal dominance in detail in our Global Liquidity series:
Chart: Notes250407“Global Liquidity (I): Rates Are Not the Main Story; Liquidity Is What Matters”
Chart: Notes250411 “Global Liquidity (Part Three): Liquidity Reinjection and Bessent’s Dilemma”
When facing the dilemma of fiscal dominance, the market will astutely choose the corresponding pricing path:
1) In Japan, the market knows that if the yen depreciates too quickly, the Bank of Japan may intervene; therefore, fiscal-dominance pricing in Japan is more clearly reflected in long-term yields.
2) In the United States, Treasury debt management could squeeze out short positions in 30-year Treasuries through buybacks or reduced issuance of new bonds，Therefore, in U.S. fiscal-dominance trades, depreciation of the dollar itself becomes the main release valve.
Chart: 30Y G4 YTD
In other words, trades in the dollar, U.S. Treasuries, the yen, and Japanese government bonds have always shared the same core trading logic, except that differences in the difficulty of the path, the freedom of market pricing, and potential tail risks meant that in the first half of the year, the U.S. market’s trade proxy was concentrated in short-dollar positions, while in Japan it was concentrated in the Japanese government bond market.
In this regard, any non-market forces can only suppress and delay the process, not change it fundamentally.
Once fiscal expansion-driven behavior by sovereign states around the world begins, it cannot easily be stopped.
This is the reason we expect Treasuries and the yen to take over from the dollar and JGBs in the second half, completing the second phase of the convergence trade:namely, the spread between long-end nominal Treasury yields and short-end real rates will widen significantly further, while the yen will see another leg of depreciation trading.
The second phase of fiscal-dominance trading is also one of the reasons we have chosen to re-enter commodities and crypto markets at this point.
Chart: WEEKLY WRAP 250713
Finally, here are a few fun charts.
1) Can you guess whose price chart this is?
Chart: Coffee prices broke above their historical highs from 1977 and 2011 in 25 1
In fact, if you look at silver prices today, you can see a long-term price pattern similar to coffee's taking shape...
The more frequently price tests support or resistance levels on annual or decade-long time frames, the more likely it is to break through that level.
A breakout of that level often signals an extreme expansion in volatility.
Chart: Silver prices since 1861
2) Germany, The same fiscal dominance, the same surge in long-term bond yields:
Chart: Germany's 30-year yield has risen to its highest level since 2023
3) Historical Relative prices of non-gold commodities versus gold:
Chart: Other commodities have traded in the bottom range relative to gold
Finally, a bit of promotion: we ask the traders in our trading room to produce a single-market note roughly every 2 days, covering U.S. stocks, A-shares and Hong Kong stocks, and commodities. We select the better ones to post in the corresponding small planets.
Anyone interested can subscribe as needed (only if you need it; don't waste your money).
U.S. stocks:https://www.meridianresearch.app/home?product=us-strategies
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Commodities:https://www.meridianresearch.app/home?product=commodity-strategies
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Wishing you all the best.
2025.07.14
Note: All content in this article is for reference only, does not constitute investment advice, and is not a basis for any laws, regulations or regulatory policies. Investors should not use or rely on this information as a basis for making decisions.