10-Year Yields: The Rate of Ascent, Not Just the Level, Threatens Stocks

One of the headlines on ZeroHedge.com states:

As 10Y Yields Surge, At What Rate Do Stocks Break?

Below is an analysis of the statement and its implications.

The statement highlights a critical dynamic:

Rapid increases in 10-year bond yields pose a greater threat to stock markets than the absolute yield level. 

Historical episodes (e.g., 1994, 2013, 2018) suggest that a 50–100 basis point rise over a few months can trigger equity corrections, particularly in high-valuation or rate-sensitive sectors. In the context of May 2025, a surge in U.S. 10-year yields (potentially to 5–5.5%) could pressure stocks, especially if driven by global factors like Japan’s bond market dynamics and/or reduced foreign demand for Treasuries.

Japan’s 30-Year and 40-Year Bonds Crater, Yields Spike (Source: WOLFSTREET.com)

Japan’s 40-Year Bond Yield Surge

In this article and other X posts (e.g., @onechancefreedm), multiple sources have discussed the recent surge in Japan’s 40-year government bond yield to an all-time high of 3.63% and its broader implications for global financial markets. Here is the summary of key points:

• The yield on Japan’s 40-year government bonds has reached 3.63%, an all-time high.
• This is significant because Japan, with a debt-to-GDP ratio above 260%, has historically relied on financial repression (artificially low interest rates) to manage its massive debt load.
• The rise in yields signals a potential loss of investor confidence in Japan’s ability to sustain low borrowing costs over the long term, challenging the Bank of Japan’s (BoJ) Yield Curve Control (YCC) policy.

Japan’s YCC policy, which caps 10-year bond yields near zero, has been a cornerstone of its strategy to keep borrowing costs low.  The surge in 40-year yields suggests that investors are demanding higher returns to lend to Japan for extended periods, indicating a crack in the BoJ’s control over long-term yields.

The Bond Market Has Lost Patience, Principal’s Shah Says (YouTube link)

Loss of Central Bank Credibility

Some X posts frame the yield spike as a “structural alarm bell,” implying that investors are losing faith in the BoJ’s ability to control the yield curve indefinitely. This is critical because central bank credibility underpins the low-yield environment that has defined global markets since 2008.

A loss of control in Japan could have a domino effect, as other central banks (e.g., the Federal Reserve, European Central Bank) rely on similar tools to manage yields. If markets begin to doubt central bank dominance, global bond yields could rise, increasing borrowing costs for governments and corporations.

Global Ripple Effects

Based on three historical parallels of past bond market disruptions:

• Japan’s 1998 VaR Shock: A sudden spike in bond yields due to market volatility.
• 1994 U.S. Bond Market Revolt: A rapid rise in U.S. Treasury yields following Federal Reserve rate hikes.
• 2022 U.K. Gilt Crisis: A sharp sell-off in U.K. bonds triggered by fiscal policy uncertainty.

These events suggest that a loss of central bank control over long-term yields in Japan could trigger a broader repricing of sovereign risk globally, affecting other major bond markets, particularly U.S. Treasuries.

Impact on U.S. Treasuries: Japanese institutions are major holders of U.S. Treasuries. If they sell these assets to rebalance portfolios or support the yen, it could reduce demand for U.S. bonds, pushing U.S. yields higher. This is particularly concerning for the long end of the yield curve (e.g., 30-year Treasuries), where demand is already sensitive to global flows.

Moody's Downgrade Fuels US Default Concerns

The X post by Richard Bernstein Advisors highlights a graph showing the credit default swap (CDS) spreads for US Treasuries compared to AAA-rated sovereign debt from nations like Singapore (9.400 bps), Denmark (4.035 bps), and Sweden (2.820 bps), indicating a significant market concern about US fiscal health as of May 22, 2025.

The CDS spread for the US spiked to 60.150 basis points, far exceeding other AAA-rated countries, reflecting investor fears of potential default risk following Moody’s downgrade of the US credit rating on May 16, 2025, due to ballooning debt and deficits, as reported by Bloomberg.

Federal Reserve Bank of Chicago data on the 2023 debt ceiling episode shows that elevated CDS spreads can stem from low valuations of long-term Treasury securities, a trend likely exacerbated in 2025 by rising yields (10-year Treasury at 4.5%) and fiscal irresponsibility concerns noted by the US GAO.

Conclusion

Investors should monitor the speed of yield changes, Fed policy signals, and equity valuations while preparing for potential volatility. Diversifying into defensive sectors, hedging with safe-haven assets (e.g., gold and Swiss franc), and tracking yield curve dynamics can help mitigate risks.