Goldman Sachs warns that the next pain point for bond traders could be the 5-year Japanese-German government bond, potentially becoming the "most vulnerable link".

Goldman Sachs strategist said that the next pain point for bond traders may occur in the five-year part of the yield curve. Strategists George Cole and William Marshall wrote in a report on Monday that five-year government bonds are particularly fragile in Japan and Germany - Japan is moving towards a more sustainable tightening cycle, while Germany's economic prospects are improving. Shorter-term bonds are deeply influenced by monetary policy expectations, while bonds with maturities of 10 years or longer are often more sensitive to inflation and deficit concerns. This makes five-year government bonds, favored globally for their relative resilience to dual risks, a "sweet spot" in the global bond market. Many long-term bonds have been sold off this year due to concerns about fiscal deficits. Bloomberg analysis shows that Japanese and German bond yields have lagged behind other developed markets this year. With narratives turning towards economic improvement and monetary policy tightening in Japan and the Eurozone, five-year bonds may become particularly vulnerable. The yield on German five-year government bonds has fallen by over 30 basis points from its peak in March, while the yield on 10-year bonds has fallen by about 25 basis points. Last week, Japanese five-year government bond issuance saw its strongest demand since June. While selling pressure may continue in Germany and Japan, the strategists said, "We expect the bearish pressure to shift from the long end to the mid part of the yield curve, and the performance of the five-year bonds in these two countries will lag behind other maturities."