With Nvidia announcing its impressive quarterly results and the US International Trade Court ruling that Trump’s “reciprocal tariffs” exceeded the scope of legal authorization (Trump decided to appeal), the market’s optimism was instantly ignited. Gold fell sharply in the short term, the US dollar index regained the 100 mark, and it seemed only a matter of time before US stocks hit historical highs.

However, the trauma caused by the tariff storm in the past few months to the global economy and market confidence is far from healed. In the medium and long term, the surge in long-term government bond yields, including the United States and Japan, is worthy of investors’ vigilance, and the hidden liquidity risk in the bond market is behind it.

30-year government bond yields of major economies Source: Tradingview

The US debt storm is looming

Since April, US debt, as a traditional safe-haven asset, seems to have become a risk itself. On the one hand, a huge amount of US debt will mature this year and need to be replaced. On the other hand, the Federal Reserve has repeatedly postponed interest rate cuts (and has not completely abandoned quantitative tightening policies), resulting in high debt costs, which undoubtedly puts US debt under great pressure to “borrow new to repay old”.

In fact, the problem of US debt and fiscal deficit is no longer “new” news, but the global inflow of safe-haven funds during the epidemic, the stability of the US economy, and the logic of AI narrative have concealed the seriousness of the problem. When the drum-beating parcel came to Trump 2.0, if the tariff war only triggered the alarm of the US debt market in advance, the large-scale tax cut bill in the legislative stage may further worsen the fiscal deficit. In this case, buyers’ willingness and ability to take over long-term bonds have declined, and they will naturally demand higher “risk-free” yields. Therefore, the recent upward trend in long-term yields does not reflect the improvement of inflation risks or economic prospects, but the contradiction between supply and demand and maturity mismatch in the US debt market.

The high volatility of the U.S. debt market reflects the distrust of investors and countries around the world in the U.S. fiscal situation and the Trump administration. China’s holdings of U.S. debt have dropped to third place, which fully reflects this.

U.S. five-year credit default swap (CDS) Source: Macromicro

Since U.S. debt is the cornerstone of the global financial market, if it continues to be turbulent, it will obviously drag down U.S. stocks and the U.S. dollar, and U.S. dollar assets may experience a “revaluation”.

Will the Fed cover the bottom? Considering the existing high tariffs and future tax cuts, early interest rate cuts or easing will put the U.S. inflation at risk of getting out of control. In theory, stable prices and full employment are the goals of the Fed, and improving fiscal conditions are not within its scope. Moreover, once the Fed makes a bottom-line statement (shows its trump card) to the U.S. debt market, it may trigger a more unscrupulous sell-off in the market.

The alarm in the Japanese government bond market

If the problem of U.S. debt has long been known to everyone, the recent volatility in the Japanese government bond market is unexpected.

Following the dismal demand for Japan’s 20-year government bond auction last week, the bid-to-cover ratio for the 40-year government bond auction yesterday was 2.21, a new low since July 2024. Overall, the recent auction bid rates for long-term government bonds with maturities of 10 to 40 years have continued to decline. Investors’ reluctance to Japanese bonds has led to a continuous increase in yields of all maturities, with 30-year and 40-year government bond yields hitting record highs last week.

Japan’s debt-to-GDP ratio is 230%, far exceeding that of other major economies. In comparison, the United States is 120%, and China and Germany are both below 100%. However, the reason why Japanese government bonds have always been regarded as risk-free assets is mainly because most of the holders of Japanese bonds are the Bank of Japan (52%) and domestic financial institutions, and overseas buyers account for only about 6%.

Bank of Japan’s government bond holdings Source: Macromicro

Due to the long-term quantitative easing and yield curve control (YCC) policies of the Bank of Japan, it has been the largest and only buyer of Japanese government bonds for a long time, resulting in reduced market liquidity and failure of pricing mechanisms.

However, since the end of quantitative easing and YCC in 2024, all Japanese government bond positions held by the Bank of Japan have fallen from their peak. After losing the largest buyer, government bond prices fell and yields rose all the way, pushing up the yen while also raising borrowing costs, and the face value of bonds held by financial institutions fell and floating losses occurred.

Not only that, if the high volatility of the Japanese government bond market continues, it may lead to the closing of US/Japanese carry trades and the closing of financial transactions with Japanese bonds as collateral, which will in turn affect global liquidity. In extreme cases, it may even trigger a triple kill of stocks, bonds and currencies. The same situation has already occurred in the US market in early April.

In order to appease market sentiment, the Japanese Ministry of Finance is considering adjusting its bond issuance plan to reduce the proportion of long-term bonds. The central bank will evaluate its bond purchase plan at the June meeting, and the market predicts that it will be difficult to continue to raise interest rates this year. Although it has temporarily suppressed the continued rise in yields, it cannot fundamentally solve the problem of market liquidity.

Some analysts believe that the Bank of Japan may restart quantitative easing or YCC, but this will cause the already high inflation to continue to rise internally, and externally cause the yen to depreciate, thereby attracting dissatisfaction from the United States. After all, one of the core demands of Trump’s trade war is to make the currencies of surplus countries, including Japan, appreciate.

If the Japanese government requires domestic financial institutions to increase their holdings of government bonds, let alone whether the institutions can bear more long-term bonds and floating losses on the books (in fact, pension institutions and other institutions are the largest sellers of Japanese bonds in recent times), to increase holdings of Japanese government bonds means to some extent that other assets need to be sold first to raise funds, among which US bonds are the first, so it may make the US bond storm more and more intense and form a vicious circle.

What has the tariff war changed?

With the launch of Trump’s 2.0 tariff war, the global economic and trade system, financial system, geopolitical situation, etc. that have lasted for decades are undergoing subtle changes, and investors have to re-examine the original investment logic.

Reducing the risk exposure of US dollar assets and finding new safe havens, increasing fiscal spending to stabilize the domestic economy (but at the same time will lead to a worsening fiscal situation and higher global yields), and overseas funds returning to the country are what is happening at this stage.

When the US and Japanese bonds, which are considered the safest assets, have hidden dangers, the safe-haven property of gold cannot be replaced in a short period of time. Since 2025, global gold ETFs have attracted a total of US$85 billion in capital inflows, easily setting a record high.

Gold ETF capital flows 2015-2025  Source: Bank of America, EPFR

In the short term, the gold price is in a stage of high-level fluctuation and downward movement. If the rebound fails to return to above 3285, it may continue to be under pressure. Pay attention to the support of the 3180-3200 area below.

XAUUSD 4 hours Source: Tradingview