Blain’s Morning Porridge May 21 2025: JGB Market Highlights Risks of Global Bond Crisis

“When sorrows come, they come not as single spies, but in mighty battalions.”

Japan’s Bond market may prove the dead canary in the coal mine warning of an imminent systemic global bond crisis. Although US stocks have staged a “Terminal Lucidity” recovery – it may prove unsustainable as the shocks start to mount, and Japanese liquidity melts away.

Have you come across the term Terminal Lucidity? It describes the sudden apparent recovery of terminally ill patients just before they resume the downward slope towards death. I’m idly wondering if that’s what we’ve seen in the recent stock market rally…

Markets shook yesterday as the unstable tectonics of the Japanese Government Bond market rocked global bonds.

Yesterday Japan 40-year long-bond yields spiked to 3.6% – staggering for a nation that has had sub 1% yields for the past 35 years of ultra-low rates and proto-QE. The fact the Bank of Japan is now “tapering” its holding of 46% of the total JGB (Japan Government Bond) market, diminishing confidence in the wobbly government of Prime Minister Shigeru Ishiba, a p*ss-poor bond auction, rising concerns about the slowing economy, ongoing structural rigidities, and concerns Japan won’t placate Trump over tariffs (they have dared to argue back – refusing a trade deal unless it immediately undoes the 25% auto tariff), collectively have caused long bond yields to spiral upwards.

It’s a wake-up and smell the coffee moment for other sovereigns in the global bond markets…..

It didn’t help that Ishiba publicly said Japan’s financial system is worse than Greece! (I’m not sure that’s actually the case…but it may yet prove a “Ratner’s Moment” comment.) It’s also likely the general Trumpian trade-war destabilisation of market confidence, and the downgrade of the USA by Moody’s to Aa1, has spooked investors – JGBs are one of the few remaining AAA rated bond markets by S&P and Moody’s. If America can tumble – who won’t?

Japan’s 250% debt to GDP ratio is the highest in the developed world – everyone knew and accepted it for decades. Suddenly it’s a problem. The current moves look brutal, and may be irreversible in the short-term, but a little bit of imaginative accounting and slight-of-hand liability management could see the real level of Japan debt about half the headline number. (See previous MP’s on Zonk Theory!)

The question is who will buy JGBs when yields are rising and global buyers (11% of the market) have walked away? The answer, is of course; Japanese investors. To do so they will have to sell other liquid assets. Guess what? Japan is the largest holder of US debt (now followed by the UK). (Curiously the yen has barely budged – but that’s probably a result of every currency under reset pressure.)

Do you see where this is going?

Systemic risk in global sovereign bond markets is rising. It gets even fruitier – it could impact stocks at the same time, triggering a global wave of contagion! Oh dear… here we go again.

The case for a bond crisis in the USA has been made many times in recent weeks. These fears have been triggered by the rising doubts around the political competency of Donald Trump – and the debt consequences if he pushes through his Big, Beautiful, Bill of Billionaire tax-cuts. Even though he’s stepped back some of the crises he’s triggered – these things tend to take on a momentum all of their own – especially when the troubles are about to arrive in mighty battalions.

In the next few weeks we will see a succession of data points likely to confirm the extraordinary impact of Trump’s panjandrum of policies on the US economy.

These are set to impact the economy deeply – and further stress the bond market. Inflation is one aspect. Jobs is another. Data about crashing tourism, empty ports, tumbling consumer confidence, housing and consumer credit is coming or about to be seen in the numbers. Business confidence is falling over the consequences of tariffs on bottom lines and the impossibility of long-term business planning in the face of an orange-faced proto-dictator determined to keep the global economy destabilised. I am sure there is more… but it is all coming.

It’s not just the USA at risk. Yesterday the excellent Marcus Ashworth on Bloomberg was warning “Britain’s Borrowing Strategy Needs an Overhaul.” He cites declining long-term demand as a result of the changing structure of UK pensions, and hardly surprising when many investors now fear stagflation and rising rates. There is also the end of Liability Investing died after the Liz Truss farrago.

In the wake of rising JGB yields last year, and the tremblor it sent round markets – which killed the carry trade (borrow in yen to invest in dollars), a few analysts spotted the danger. “The most important thing in 2025 that people are not talking about is Japan”, said BCA. I reported it briefly, but missed the significance. I didn’t spend much time putting it all together – I think Biden had just stepped back.

Japanese investors have been one of the main sources of global liquidity – due to the ongoing easy Japan Zero-Interest Rate Policy (ZIRP), a hang-back from decades of QE. That’s an important point to note – from 2010-2022, most western nations engaged in some form of ZIRP/QE to keep interest rates artificially low – the result was not to create growth, but to inflate the value of financial assets. Once clear example of that was the US economy doubling in size between 2010 and 2025 while the value of its stock market rose about 5 times – explain? The only answer is inflation in the price of financial assets.

One factor BCA noted last year is how US tech stocks pretty much move in line with Japan yields – hinting the ongoing, and often irrational moves in US tech names are fuelled by Japanese liquidity – explaining much of their frothiness!  That could be unravelled.

Suddenly, it looks like the Japanese liquidity spigot has been turned off, and is likely to be redirected to funding Japan’s bonds! The alternative is for the BoJ to reverse its taper and reinstitute QE, by buying JGBS – which would simple recreate the ongoing financial distortions we’re now suffering the consequences of.

Meanwhile, just to add to the fun, I am indebted to James Eagle of EEagli -pointing out tomorrow night’s $TRUMP dinner for the largest holders of Trump’s memecoin. 19 of the top 25 holders – who get a private reception with the President – used offshore exchanges that ban US users! Wow.  (Please, please arrest them all.) $Trump is definitely not corruption at all. All these foreigners that have bot the President’s coin are just just showing their love. None of them will want any favours in return. Top $Trump holder is Justin Sun, a Hong Kong player carrying previous history with US financial regulators!

Let’s see how the JGB crash plays out on markets…

Out of time, and back to the day job..

Bill Blain

Author of the Morning Porridge

Founder Windshift Capital

Partner Shard Capital