G7 bond yields are breaking higher into 2026
In this article we demonstrate the consequences of a bond bear market while equities are in in a bubble. Something will have to give and it will be equities.
Introduction
Bond markets of three G7 nations are on the verge of crashing. The USA, UK, and Canada are not far behind, and the jury is out for Italy. But with Japan and two Eurozone nations facing a debt crisis, they are almost certain to take down the other G7s as well.
The most important of the crash candidates is Japan, because low yields for JGBs have encouraged Japanese pension funds and insurance companies to invest in US Treasuries instead. Furthermore, the Bank of Japan’s interest rate suppression has given Japanese institutions an additional benefit from a weakening yen to the dollar, moving from ¥103 in late-December 2020 to ¥158 currently, a profitable decline of 35%.
Japanese institutions now account for $1.2 trillion of US Treasuries. Mostly by way of a yen-based carry trade, US captive insurance companies and offshore hedge funds based in the Cayman Islands account for an additional $418.5 billion.
Additionally, special purpose vehicles operating out of Luxembourg account for most of an additional $419 billion, and London-based carry traders funding in cheap euros probably represent the bulk of an additional $878 billion. Belgium, where Euroclear is based accounts for an additional $468 billion of US Treasuries.
That is a total of $3,383.5 billion of US Treasuries mostly owned by speculative foreign-based “shadow banks” basing their ownership on yield differentials between the US and Japan and the Eurozone. It is locking in US Treasury yields to those of sovereign bonds in the euro and yen. Where they go, so will US Treasuries.
