I have been pretty sure that yields on JGBs were going to go much higher, and this has been right.
I did have an expectation that this would drive yields much higher elsewhere. This has not been so true. US yields are higher, but still within a level that we have seen before within living memory.
And the biggest surprise have been the collapse in Chinese bond yields, to close to all time lows.
What disturbs me about this, is that my view on bond yields was driven by a view that the world is becoming more “populist” or pro-labour. Generally speaking, this would also include China - and yet its bond yields remain at low levels. If I just look at Japan, I could speculate that loan demand is what drives bond yields. Japanese loan data inflected in 2013, and have not looked back.
FDIC data for US banks show aggressive loan growth has become in recent years, and in particular in contrast to slower loan growth in the 1990s.
The problem is that Chinese loan growth also seems pretty good.
One thing that is different between China and Japan, is that foreign investment is dropping in China, and rising in Japan. The best was to see rising FDI in China is in the increase in it NIIP. Falling FDI into China, and rising FDI out of China should drive a higher NIIP.
While from Japanese NIIP data, we can see that foreign investment into Japan is rising from a low base.
The problem with FDI as a driver of bond yields is that the US has FDI into the US even through the period of low yields.
So that leaves government spending. Going back to the US, government spending seems to drive yields. Government expenditure rose rapidly in 1970s and in 2020s.
And a similar dynamic is playing out in Japan. The increase in spending matches the inflection in JGB yields higher.
Chinese data is a bit hard to compare but there is definitely a slowdown in government spend in 2025 at least.
There is a way to check this hypothesis. In Europe, the UK has the higher government bond yields. Government expenditure looks like this.
Switzerland has the lowest bond yields in Europe. Its government expenditure looks like this.
This seems to prove what I always thought. Sovereign bond yields reflect markets belief in governments ability to control spending. And in the UK, with Reform on the right and Greens on the left - there is no belief.
