Germany’s break with fiscal conservatism is a watershed moment. The ramp up in defence and infrastructure spending, and the loosening of fiscal rules to accommodate this, will be an important, additional source of upward pressure on global government bond yields in the coming years. China has also raised its general budget deficit to the highest level in more than three decades, with the ‘broad’ deficit rising to a record 9.9% of GDP.
There was further selling pressure on JGBs again this morning after the release of the cash earnings data for January. The y/y for base pay accelerated from 2.6% to 3.1%, the strongest pace of underlying wage growth since October 1992. Rengo will push for an average wage increase of 6.09% this year, up from last year’s 5.85%.
For now, US Treasury yields are rallying alongside the drop in equities. Bessent has reiterated his (and Trump’s) focus on bringing down the ten-year Treasury yield. So far, he has succeeded in talking it lower, with what could be termed ‘forward guidance’ for fiscal policy. The reality is, however, that the federal budget deficit has continued to widen fiscal year-to-date. More importantly, there are no concrete, nor coherent, plans for deficit reduction, let alone towards 3% of GDP.
Given the role of JGBs (and bunds) as anchors for global sovereign bonds, further rises in JGB yields could eventually hit US Treasuries too, putting further pressure on US equities, in particular AI-related stocks. Investors are balking at the huge sums being poured into AI as the leading US tech companies compete to build data centres and remain at the forefront of the AI race. The productivity gains from AI are yet to be proven, and exuberance had reached fever pitch.
