Daily

	Close	Previous Close	Change
Australian 3-year bond (%)	3.434	3.489	-0.055
Australian 10-year bond (%)	4.391	4.453	-0.062
Australian 30-year bond (%)	5.076	5.159	-0.083
United States 2-year bond (%)	3.987	3.985	0.002
United States 10-year bond (%)	4.511	4.531	-0.02
United States 30-year bond (%)	5.037	5.0395	-0.0025

Overview of the Australian Bond Market

Australia’s 10-year government bond yield fell 6 bps to around 4.39% on Monday, following the lead from the US treasuries market on Friday. Domestic investors await domestic economic releases later this week. The upcoming data, including Wednesday’s monthly CPI indicator and Friday’s retail sales figures, are expected to provide crucial insights into inflation trends and consumer spending, as both are key factors in the Reserve Bank of Australia’s policy outlook.

Markets are now pricing in a 65% probability of another rate cut in July, with expectations of a total 75 bps of easing by the first quarter of 2026. Additionally, the country’s financial markets have a pretty firm view about where interest rates will go – down to 3.1% by the end of the year, where they will remain for at least six months. That’s three quarter-point rate cuts from the RBA.

Overview of the US Bond Market

US markets were closed on Monday due to the Memorial Day holiday. But what is going on in the Japanese bond market because, trust me, these developments could develop into a major risk to US treasuries.  

JGB yields surged last week as BOJ shifted policy gears, exposing cracks in market liquidity and testing 

investor confidence. With fiscal health intact but global carry trades at risk, Japan’s bond market looms as a potential disruptor in H2. Japan’s 30-year government bond yield surged to a record high of 3.18%. Since the pandemic, long-term JGB yields have been on an upward trend. With inflation and wage growth picking up, the Bank of Japan has been moving toward policy normalization. In recent years, the BOJ has ended yield curve control (YCC), started raising rates, and even begun quantitative tightening (QT)—all contributing to the steady rise in JGB yields. 

Japan’s bond market is facing growing stress. The BOJ’s latest Bond Market Survey showed the JGB market 

functioning index fell sharply to -44 in Q2, the lowest since May 2023. Investor confidence took another hit after Japan’s 20-year government bond auction on May 20 showed weak demand. The bid-to-cover ratio dropped to 2.50, the lowest since 2012. The lowest accepted price was ¥98.15—far below the expected ¥99.80. The tail widened to ¥1.14, the largest since 1987, signaling poor liquidity and weak interest. 

What is everyone so worried about? Japanese banks’ yen lending abroad—a proxy for medium-term carry trade magnitude—has surged to $1 trillion (145 trillion yen), often to asset managers, driven by rate differentials. Unlike futures traders, asset managers may unwind positions gradually, raising the medium-term risk of reversal. Rising JGB yields may prompt major Japanese life insurers to increase their JGB holdings. To fund this, they could sell US Treasuries. Since Japan is the largest foreign holder of U.S. debt, any shift in its holdings could have ripple effects across global markets.  

Moving forward, there are several key dates ahead that could significantly impact the yen and Japan’s bond market: 

• June: The Bank of Japan will announce its balance sheet reduction plan for next year. Markets currently expect a gradual pace—around a 6–7% reduction over two years. However, if the BOJ opts to speed up the process, it could put pressure on global markets. 

• July: The 90-day tariff pause expires. If Trump resumes imposing high tariffs, it could trigger renewed global market volatility. 

• Q3: If the U.S. Congress passes both the tax cut and debt ceiling bills, the Treasury is likely to increase long-duration bond issuance, pushing global yields higher. 

• Q3–Q4: Markets expect the Fed to cut rates twice and the BOJ to hike once in the second half. If either central bank turns out to be more hawkish than expected, it could unsettle markets. 

 Bottom line: Japan’s financial markets will be a key area to watch in the second half of the year. With rising global uncertainty, market tolerance for surprises is falling. In this environment, close attention should be paid to the JGB market, alongside inflation trends and BOJ policy signals. 

Given the holiday, we thought we would add a little broader context in terms of the impact of the long-end of the treasuries curves, namely the 60/40 balanced portfolio.  

A slump in the US long bond is clouding the comeback of a classic 60/40 investment strategy. While a bedrock of retirement savers over decades, the approach lost some of its luster in recent years as its underlying mechanism fell out of whack, with US stocks and bonds moving more in lockstep rather than offsetting each other.   

This year, the strategy has come back into its own, performing as advertised even amid violent swings in both stocks and bonds. A US gauge of the 60/40 mode returned some 1.6% this year through mid-May, besting the S&P 500 Index’s return in the period, and with lower volatility. A key part of the revival has been the return of the traditional inverse relationship between stocks and bonds. The correlation between US equities and fixed income over the past six months has reached the most negative level. 

One recent major development has cropped up, though, to threaten that balance. Benchmark 30-year Treasury bonds have taken a tumble this month, sending yields above 5% toward the highest in almost two decades as investors grow increasingly wary of holding long-term US debt amid spiraling debt and deficits. What you are seeing in the back end of the curve globally is that they are behaving like risk assets, not like the typical kind of defensive risk-averse assets.  

But in actual fact, it may be more a case of the model being bent but not broken. The key is to pick the right bonds along the yield curve. While a lot of the concerns that deficits impact bond valuations further out the curve, we do think that the front end is likely to behave as investors would expected. The outperformance of shorter-to-medium term bonds also explains why the benchmark US bond index – which has similar interest-rate risks to that part of the curve — remains negatively correlated to stocks. The average duration of the Bloomberg Treasury Index, a measure of interest-rate risk, is about 5.7 years.  

On the economic data front, last week was a particularly quiet week, which may partly explain the very high focus on all things related to the budget deficit. This week is different. On Tuesday Consumer Confidence and Durable Goods is released. On Wednesday, Nvidia releases its earnings as well as the release of the FOMC Minutes. On Thursday and Friday, GDP data will be released, Jobless Claims, and the all important PCE inflation print. US markets are closed on Monday.