The global fiscal "powder keg" fuse is still lit: US and Japan's long bond cooperation rebound may be calm before the storm.

The violent rise in the global bond market on Tuesday finally brought some relief to US long-term bond investors. The benchmark yield, the 10-year US Treasury yield, and the longer-term 30-year US Treasury yield finally saw substantial declines. According to market strategists, part of the logic behind the massive rebound in the global bond market on Tuesday was news that after sustained sharp declines in the bond market, the Japanese authorities may adjust the pace of debt sales, indirectly driving strong demand for $690 billion of two-year US Treasury bonds. Although the global bond selloff, especially in the US and Japan, has temporarily eased, concerns about the fiscal conditions of developed countries worldwide and about the US fiscal deficit, particularly the growing debt interest payments in the US in recent years, are expected to continue to bring significant selling pressure to long-term bond investors in the coming weeks and months, potentially leading to another global bond selloff. With the structural imbalance in the bond markets of developed countries globally unresolved - particularly the increasing size of US debt interest payments pushing the US fiscal deficit further, any technical relief may only be temporary, and the wave of US bond selling may continue to put downward pressure on global financial markets, greatly impacting global stock and bond markets. Investor inflows boost long bonds, with the US 30-year Treasury bond yield experiencing its largest single-day decline since March In the macroeconomic backdrop of worsening fiscal prospects and ongoing tariff tensions, investors have once again favored long-term US Treasury bonds in recent weeks - temporarily reversing the recent severe selloff triggered by concerns about the fiscal deficit. The 30-year US Treasury bond yield recorded its largest single-day decline since the end of March, with news that the Japanese fiscal authorities may adjust the size of bond issuances to address the ongoing sharp decline in the local bond market. Additionally, Japan's expected reduction in long-term government bond issuances has greatly boosted demand for the $690 billion two-year US Treasury bond sale, contributing to the rise in US bonds. Although US President Donald Trump continues to announce tariff measures and his landmark tax reform law faces challenges in the House of Representatives, leading to continued market pressure - the tax cuts may further worsen the already deteriorating US fiscal deficit. However, Tuesday's global bond market rally undoubtedly eased the nerves of bond market bulls, as the so-called "safe haven" status of US bonds was questioned, prompting long-term investors to withdraw from this asset class in recent weeks. "Market sentiment has slightly improved, noticeably calmer than before," said Tony Rodriguez, head of fixed income strategy at Nuveen on Tuesday. But he also warned, "The current range for US bonds remains very fragile, as there is too much uncertainty." "The psychological significance of the 30-year US Treasury bond yield falling back below 5%," said Catherine Brooks, director of research at XTB. "Risk sentiment thus received a temporary boost." Earlier, the Japanese authorities hinted that the government was considering adjusting debt issuance plans as borrowing costs at the longer end reached the highest levels in decades. Concerns about whether countries can cover massive budget deficits have continued to bear on developed market government bonds, even pushing longer-term US yields (10 years or more) close to 2007 levels. "A reduction in bond issuance would be a real boon for US bonds," said Michael Brown, a strategist at Pepperstone in London. "For investors seeking to allocate to long-term bonds, if Japanese long-term bond supply decreases, they may be forced to turn to long-term US bonds." According to reports in the media earlier on Tuesday, the Japanese Ministry of Finance distributed a questionnaire to market participants on Monday evening, seeking opinions on debt issuance and the bond market. This rare move is widely seen by traders as a signal that the government is attempting to stabilize the sharp decline in long-term government bonds. Some countries have begun to focus on issuing short-term government bonds. The UK has reduced such issuances in response to declining demand for long-term bonds, attempting to alleviate the so-called "term premium" wave. Jessica Plai, head of the UK Debt Management Office, reiterated this strategy in an interview with the Financial Times on Tuesday. The 30-year UK gilt yield fell by 9 basis points on Tuesday (the UK market was closed on Monday), but then narrowed its decline. The yield on German government bonds of the same maturity also fell by 7 basis points, dropping back below 3%. Temporary relief from the selloff, difficult to substantively counteract the market's intimidating "term premium" If the Japanese government reduces the supply of long-term bonds, it will at least to some extent alleviate concerns about bond demand in the market. However, broader concerns about the global imbalance in fiscal conditions - particularly the deteriorating fiscal deficit expectations due to the increasing size of debt interest payments - remain unresolved, making it difficult for Tuesday's bond market rebound to last. Meanwhile, if the Bank of Japan further reduces its massive holdings of government bonds, it could exacerbate the tense selling sentiment in global bond markets. "Long-term yields have received temporary relief, but we believe that in the coming weeks and months, US bonds will still struggle to shake off the shadow of selloffs," said Benjamin Schroders Global, a senior interest rate strategist at ING. "The trajectory of the fiscal deficit remains crucial." The US bond market has continued to be a focus for global investors, with volatility in global financial markets since Moody's stripped the US of its top credit rating. The passage of the Trump administration's landmark tax reform legislation through the US House of Representatives last week is expected to increase the federal debt ceiling by a staggering $4 trillion, further exacerbating the selloff sentiment in the US bond market. The term premium for the 10-year US Treasury bonds, which measures investors' concerns about the future borrowing scale in Washington, is now close to its highest level since 2014. Investors are closely watching this week's upcoming five-year and seven-year US Treasury bond auctions, as well as the meeting minutes of the Federal Reserve, and the release of inflation data. During the Biden administration, the massive issuance of government bonds has significantly increased the size of US Treasury debt to $36 trillion in just a few years, leading to further soaring of the fiscal deficit and record high US bond interest payments, with yields of all maturities rising significantly.In the next 25 years, there may continue to be a frenzy, especially in the longer-term US Treasury yields (10 years and above), which may continue to break through multiple historical highs driven by "term premium".In the view of some economists, the national debt and budget deficit in the Trump 2.0 era will be much higher than official predictions. This is mainly due to the new government led by Trump, with a core framework of "tax cuts at home + tariff increases abroad" to promote economic growth and protectionism. Additionally, with the increasingly large budget deficit and interests on US debt, the US Treasury may be forced to issue more bonds in the "Trump 2.0 era" than the Biden administration, which was already spending at a rapid pace. Furthermore, under the backdrop of "deglobalization", China and Japan may significantly reduce their holdings of US debt, leading to a higher "term premium" than in the past. As the market begins to worry about the inflationary impact of Trump's policies and the significant increase in financial pressure, the outlook for US debt is unlikely to completely reverse the dim trend. The US fund giant T. Rowe Price believes that as the US fiscal situation deteriorates and Donald Trump's policies lead to rising inflation, the yield on 10-year US bonds may climb to 6% for the first time in over 20 years. The term premium refers to the additional yield compensation required by investors for holding long-term bonds. Looking ahead to the next few years, the tariff increases may even become a common consensus in the Western world. In the increasingly fractured "deglobalization" era, the ever-growing interests on US debt, military defense and tax cuts led by domestic policies of the Trump government are embarking on a path of significant expansion. The market's concerns about the sustainability of the increasingly large US government debt and long-term inflation risks are significantly heating up, and the term premium that once frightened the financial markets is making a comeback. The yield on the 10-year US bonds, known as the "anchor of global asset pricing", is brewing a wild surge that may surpass the over 5% spike in 2023. "If you think that by 2025 and beyond, we will continue to maintain government deficits of at least a trillion dollars, coupled with the market pricing in the expanding interest expenses on US debt, then ultimately, these negative expectations will accumulate and completely overwhelm the issuance volume of US government debt." Tom Tezzi, fixed income director at Strategas Research Partners, said.