What happened

No end in sight for the long end. 30Y JGBs surged past the 3%-handle last week following a string of weak debt auctions amid sticky domestic inflation prints, while 10Y JGBs hover around 1.5%, the highest levels since 2008. Coupled with the recent downgrade of US debt by Moody’s and the passage of President Trump’s deficit-expanding “big, beautiful” tax and spending bill to the Senate, it appears that a week of time is not too short to accumulate bad news for long duration bonds. QTD, yield curves have steepened across the globe; unless market dysfunction forces the Fed’s hand, long-dated Treasuries remain vulnerable, and further yield overshoots are likely.

What it means

Japan is the single-largest foreign holder of US Treasuries, with more than USD1.1tn on its books. For decades, Japanese investors have borrowed yen to buy into higher-yielding US debt and equity assets, a strategy known as the carry trade. Both (a) rising JGB yields and (b) strengthening JPY would eventually shift the calculus for domestic investors and lure that money home, potentially reigniting a flight from USD assets last seen in the April “tariff tantrum” and higher term premiums. However, given that (a) inflation remains sticky in Japan, while (b) the BOJ remains poised to "significantly" scale back its JPY6tn monthly bond-buying program, risks remain in a premature pivot back to onshore JPY assets. We expect that domestic investors would watch for turning points in inflation and monetary policy signals from the BOJ for more certainty before hastily making any significant asset allocation decisions.

How to invest

Equities

• With Japan being a major source of global liquidity, surging JGB yields inevitably ignite concerns of liquidity-shock sell off in global equities as Japanese investors seek to obtain higher yield at home. Above all, yen appreciation on the back rising JGB yields also pose the risk of yen carry trade unwind.
• But despite these concerns, we see limited chance of contagion risks in the equities space as sentiments remain underpinned by tariff de-escalation (notably between US and China) and sweeping tax cuts by Trump administration. Renewed fiscal impulse in Europe (particularly Germany) are additional tailwinds supporting equity sentiments.
• Latest flow data suggests cautious tilt in investors' positioning with rotation into consumer staples and healthcare. Maintain Neutral stance but seek opportunities in structural winners. Favour US Technology, European defence plays and Asia REITs.

Bonds

• We maintain that ultra-long duration bonds (>10Y) are not a suitable play for this rate cutting cycle as fiscal risks remain a clear and present danger. While we have favoured a barbell duration expression of 2-3Y and 7-10Y bonds, investors should time the opportunities when extending duration – picking entry points when 10Y UST comes within the range of 4.5-5%; such outsize rate swings imply that investors can add 7-10Y IG credit at much more favourable levels.
• We also prefer corporate to government risk, as we think that credit spreads provide an adequate cushion to rates volatility. If we had to pick within a government bond allocation, we prefer opportunities in (a) mortgage-backed securities (MBS) given wider spreads, and (b) long-dated TIPS as a hedge against inflation.

Gold

• We remain overweight gold, and have recently upgraded our price forecast to USD3,765/oz. Steeper yield curves are symptomatic of more geopolitical uncertainty, a widening US fiscal deficit, de-dollarisation, and fiat currency debasement; all of which are tailwinds for hard assets such as gold.
• Other tailwinds include rising recession/stagflation risk in the US, while the deterioration of geopolitical alliances under the Trump presidency raises the urgency to diversify reserves away from US Treasuries towards more neutral assets. Central bank buying remains consistent – underpinning the price-insensitive nature of gold demand.