Summary of Key Points
Recently, bond yields in major global countries (the United States, Japan, the United Kingdom, Germany, etc.) have soared to multi-year highs, plunging the bond market into a "collateralized storm." Brooks, former chief economist of the International Financial Institute, pointed out that central banks have artificially suppressed bond yields for extended periods, preventing the market from detecting real debt risks. The current market no longer responds to traditional positive signals (such as a slowdown in U.S. inflation); instead, long-term yields are rising, indicating that debt pressures are accumulating. Japan is in the most severe situation, already experiencing an "invisible debt crisis," and other countries must also be wary of the risk of increasing long-term debt costs.
1. The Abnormality in Global Bond Markets: Why Don't Positive Signals Work Anymore?
Last week, U.S. inflation data was more modest than expected (considered "dovish"), which would normally suggest that the Federal Reserve might not continue raising interest rates, and long-term bond yields should have declined (as there would be less concern about future interest costs). However, the opposite occurred—long-term yields rose globally, with some regions experiencing even more dramatic increases.
Brooks calls this a "very concerning sign": The bond market is now concerned not about short-term interest rate hikes but whether long-term debts can be repaid. Previous positives (such as no interest rate hikes) only addressed short-term issues, but the growing scale of long-term debt and the increasing cost of interest have overshadowed these benefits. The market is voting with its feet by raising yields to express doubts about the sustainability of future debt.
2. A New Measure for Assessing Debt Crises: 10y10y Forward Yields
Brooks uses a metric called "10y10y forward yields" to assess risk. This may sound complex, but it's actually simple:
- Ordinary 10-year bond yields are affected by short-term central bank policies (such as whether interest rates will rise or fall).
- 10y10y forward yields reflect market expectations for 10-year bond yields in 10 years (calculated from 10-year and 20-year yields), removing the influence of short-term policies and providing a more accurate reflection of how the market views the government's ability to repay debt over the long term.
In the past week, 10y10y forward yields have risen in almost all major global countries: by 14 basis points in France, 13 in the United Kingdom, and 11 in Japan. Even the United States, considered a safe haven, saw a rise of 5 basis points. This indicates that concerns about long-term debt risks are spreading globally, not just a problem for individual countries.
3. Japan: A Typical Case of an Invisible Debt Crisis
Japan's situation is particularly prominent. Brooks believes it is already in an "invisible debt crisis":
1. Severely Distorted Yield Curves: The Bank of Japan has long controlled the upper limit on bond yields (for example, keeping 10-year yields below 0.5%), resulting in seemingly low yields, but the market believes that the actual "shadow yields" are much higher, hiding real risks.
2. The Root Cause of the Yen Depreciation: Artificially suppressing yields has led to the perception that Japan has too much debt and its currency is worthless, causing the yen to depreciate continuously. Even Japanese government interventions in the foreign exchange market (such as buying yen and selling dollars) are ineffective because the fundamental issue is debt, not the exchange rate.
3. Data Evidence: Using the Z-score (a measure of how far yield curves deviate from historical norms), Japan's values have long exceeded the normal range (always around 2, much higher than other G10 countries), indicating that its long-term debt risks are extremely high.
The latest data shows that Japan's 10-year bond yields have risen to 2.945%, the highest since 1996, meaning the cost of borrowing for the Japanese government is increasing, and the invisible crisis is becoming more apparent.
4. Other Countries: Don't Think You're Immune; Risks Are Accumulating
Although the distortion of yield curves in other G10 countries (the United States, Germany, the United Kingdom, France, etc.) is less severe than in Japan, Brooks warns that the key to determining debt sustainability is the "real yield" (the interest cost after inflation adjustment), and global real yields are rising.
For example, although the United States is considered relatively safe, its 10y10y forward yields have still risen by 5 basis points; France and the United Kingdom have seen even larger increases. This indicates that all countries are facing increasing long-term debt costs. If governments do not control debt levels, borrowing will become more expensive in the future, potentially leading to similar outcomes as Japan.
5. The Aftermath of Central Bank Interventions: Market Signals Fail, and Crises Become More Hidden
Brooks's core argument is that central banks' long-term suppression of yields has deprived the market of its ability to warn of debt crises. Normally, rising bond yields signal potential government debt risks, but central banks lower them by buying bonds, effectively "shutting down" the market's warning mechanism.
The current situation shows that these efforts are becoming less effective; even when central banks try to suppress yields, the market resists (yields continue to rise). This indicates that debt pressures have reached a point where they cannot be hidden any longer, though a full-blown crisis has not yet erupted. Japan is a prime example: failing to control yields led to a currency crisis, and the root cause of the crisis remains debt.
Conclusion
The "collateralized storm" in global bond markets is not accidental but the inevitable result of long-term debt accumulation and central bank interventions. Japan is the first country to experience an invisible debt crisis. If other countries do not address their debt issues, they may face even more severe risks in the future. Investors should be aware that rising long-term bond yields can affect stock and real estate markets (e.g., through higher mortgage rates) and be cautious of asset price volatility. For governments, controlling debt levels and reducing market intervention are essential to solving these problems.