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• 30-year sovereign bond yields are climbing to multi-decade highs.
• Bond market liquidity is now at its weakest since the 2011 Eurozone debt crisis, approaching levels last seen during the 2008 financial crisis.
• In response, gold is breaking out to new highs in nearly every major currency.

An important development is underway. Though it is not currently leading to problems in global markets, if continued, it may warrant action on the part of investors. Japan’s sovereign bond market is facing its worst liquidity crisis on record, with interest rates climbing to historic highs. Bloomberg’s liquidity index—which tracks Japanese debt with maturities of one year or longer—indicates that conditions are rapidly worsening. The index has soared to unprecedented levels, and long-term Japanese bond yields are also reaching record highs.

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Source: Financial Sense Wealth Management, Bloomberg

Nuclear Fallout Is Global

Sovereign bond yields worldwide began rising sharply in 2021–2022, corrected briefly at the end of 2022, and resumed their climb in 2023. Outside Japan, yields largely moved sideways last year, but the calm has ended. Today, many 30-year sovereign bond yields have broken through their 2023 highs to reach multi-decade levels.

Japan leads this surge, with European markets such as Germany, France, and the UK following suit. The U.S. has so far avoided similar breakouts, aided by Treasury Secretary Bessent’s shift toward shorter-maturity issuance and the expansion of Treasury buyback programs in long-term debt.

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Source: Financial Sense Wealth Management, Bloomberg

Traditionally, long-term yields fall when central banks cut short-term rates. This time, however, yields are rising despite a global easing cycle. Most central banks—except those in Japan and China—are expected to cut rates over the coming year (see yellow boxed column below). This divergence is unusual and underscores how sovereign debt dynamics are overwhelming standard monetary policy patterns.

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Source: Financial Sense Wealth Management, Bloomberg

Bond Vigilantes and Liquidity Risks

Post-COVID, many governments continue to run recessionary budget deficits despite having exited recessions years ago. This ongoing fiscal excess is awakening bond vigilantes—investors pushing yields higher to demand compensation for risk.

Japan’s bond yields have risen the most, but the UK currently holds the worst liquidity ranking on Bloomberg’s index (grey line below, top panel), followed by Japan (red line) and France (blue line). Global bond market liquidity is now at its weakest since the 2011 Eurozone debt crisis and approaching levels last seen during the 2008 financial crisis (bottom panel below). Historically, such liquidity shocks have spilled over into equity markets, creating broader financial instability.

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Source: Financial Sense Wealth Management, Bloomberg

When you view the bottom panel in the prior image you see a slow persistent deterioration in global bond liquidity and the likely culprit is surging debt issuance by sovereign countries running persistent budget deficits and pushing ever higher their debt-to-gross domestic product (GDP) ratios. This can be seen in the table below of select sovereign debtors where all but two in the list have debt-to-GDP ratios north of 100%, are running recessionary budget deficits, and have a fair amount of debt to roll over in the coming year.

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Source: Financial Sense Wealth Management, Bloomberg

Back in January, we penned an article predicting unrest in global bond markets (Buckle Up: Bond Vigilantes Are Back), highlighting that at the time there was nearly $14 trillion in debt rolling over from G10 countries. Rising sovereign bond yields are putting continued strain on government finances as the cost of servicing their debt rises and with it the risk of failed sovereign bond auctions.

Gold Price at New Record High

With these risks in mind, we substantially increased our allocation to precious metals and mining stocks ahead of the recent surge in prices. Lately, gold has climbed to record highs in nearly every currency, driven by robust central bank demand. Both short-term and one-year performance tables highlight consistent gains worldwide, underscoring the strength of gold’s bull market. As we and many other strategists anticipated, global investors are turning to gold as a hedge against growing sovereign debt instability and currency risk.

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Source: Financial Sense Wealth Management, Bloomberg

Taking even a wider lens, when we look at the performance of gold on a short-term basis (left columns below) out to a year (far right column) we can see the move higher in gold has truly been global. Viewing its performance across more than thirty foreign currencies shows gold swimming in a sea of green.

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Source: Financial Sense Wealth Management, Bloomberg

Yield Curve Control on the Horizon?

If central banks follow through with expected rate cuts while long-term yields continue to rise, markets may force them into yield curve control (YCC). Under YCC, central banks cap long-term rates, protecting bond markets at the expense of currency stability.

The trade-off is stark: either accept soaring interest costs and bond market instability or suppress yields and risk currency devaluation. Against this backdrop, is it any wonder that gold is surging to new all-time highs priced in every single currency on the planet?

Disclosure: We are long precious metals and best-of-breed mining stocks via a select basket of companies we refer to as the “Shiny 7”.

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