In May 2026, an epic sell-off storm swept through the core sovereign bond markets of the United States, Japan, and Europe. Long-term government bond yields surged, with multiple indicators hitting near-20-year or all-time extremes, plunging global financial markets into a rare credit repricing crisis. On May 19 of that month, the intraday yield on the 30-year U.S. Treasury bond touched 5.197%, settling at 5.183% at the close, breaking through the critical 5.1% psychological threshold.
The core bond markets of Japan and Europe came under simultaneous pressure. The yield on Japan's 30-year government bond briefly spiked to 4.2%, and the yield on the 40-year super-long-term government bond broke post-war records. Long-term bond yields in France and Italy within the eurozone climbed rapidly, while the yield on the 10-year UK gilt briefly touched 5.11%. After experiencing three weeks of panic selling, the yields on long-term bonds in the U.S., Japan, and Europe pulled back from their highs and fluctuated in wide bands through July and August. While short-term selling sentiment eased, the market's high-risk pattern was not reversed.
Market data showed that on July 31, the 30-year U.S. Treasury bond reached a peak of 5.274% for this cycle, fluctuated downward from high levels in early August, pulled back to 5.20% on August 7, and climbed to 5.28% on August 11. Japan's long-term bond yields declined visibly from their May highs but remained far above the 2025 full-year average, showing the rather clear characteristics of remaining at prolonged high levels. European bond markets similarly maintained high-level volatility, with long-term bond yields in Germany and the UK remaining persistently high, while Italian and French long-term bonds stabilized in high ranges, leaving regional debt pricing risks insufficiently unspooled.
ANBOUND's founder Kung Chan believes that long-term government bond interest rate levels of 5% or 6% are not uncommon in global historical market trends, and that there are exaggerations in the current market. However, the world's financial markets today indeed face major issues. This problem stems from the fact that the finances of major global economies such as the U.S., Japan, Europe, and China are highly dependent on debt expansion, relying on the continuous issuance of new government bonds to fill fiscal revenue and expenditure gaps. This debt rollover model operated smoothly in the low-interest-rate environment of the past twenty years, but since 2022, the global interest rate center has systematically shifted upward. The combination of high debt and high interest has gradually spawned a negative feedback loop of debt expansion, and market doubts regarding the sustainability of mainstream bond-issuing models continue to heat up. This situation is dire, because finance is built upon a foundation of credit.
As the world's largest debtor, the U.S. faces unprecedented fiscal and debt rollover pressures. As of the second quarter of 2026, U.S. federal public debt exceeded USD 39.96 trillion, and the debt-to-GDP ratio rose to 125.8%. The current U.S. fiscal situation has fallen into a vicious circle, where mandatory expenditures continue to rise, tax revenue growth is sluggish, fiscal deficits rely habitually on bond issuance for backing, and the massive interest generated by bond issuance further widens the deficit. In fiscal year 2026, the U.S. federal budget deficit exceeded USD 1.5 trillion, with mandatory expenditures such as Social Security and Medicare accounting for over 70% of total spending.
In 2026, the annual interest expenditure on U.S. Treasury bonds exceeded USD 1.2 trillion for the first time, surpassing the defense budget to become the single largest mandatory expenditure in the federal budget. The scale of government bonds maturing and reissued throughout the year approached USD 10 trillion, resulting in immense debt rollover pressure. Constrained by three major mandatory expenditures, namely welfare expansion, geopolitical military spending, and AI industry subsidies, the "3-3-3 plan" introduced by the U.S. Treasury Secretary finds it difficult to tighten fiscal policy, which means that the country will still need to rely on expanded bond issuance to maintain operations over the long term.
Japan is the developed economy with the highest debt-to-GDP ratio in the world, with the IMF forecasting Japan's total government debt-to-GDP ratio at a staggering 204.4% in 2026, ranking its debt burden first among global developed economies. Japan holds USD 1.19 trillion in U.S. Treasuries, making it the largest foreign holder of U.S. debt. Its bond market and monetary policy fluctuations can trigger global financial chain reactions through cross-border channels, with strong risk transmissibility.
The eurozone's debt scale continues to climb, and traditional fiscal constraint mechanisms have partially failed. In the first quarter of 2026, the debt-to-GDP ratios of the eurozone and the European Union continued their upward trajectory, with debt ratios in multiple countries, including Italy, Greece, and France, surpassing 100%, persistently breaching the EU's 3% deficit red line. The crux lies in institutional flaws, i.e., the monetary union is paired with decentralized fiscal sovereignty, and the single monetary policy of the European Central Bank is ill-suited to the divergent economic structures of individual nations. Coupled with new mandatory expenditures for the green transition, pensions, and defense, low-speed economic growth finds it difficult to digest existing stocks of debt, leading to the continuous accumulation of regional debt risks.
Kung Chan further pointed out that the fiscal systems of economies such as the U.S., Japan, and Europe can be analogized to massive "major listed companies" that universally experience enormous revenue and expenditure gaps, relying entirely on bond issuance to maintain operations, with U.S. Treasuries serving as the largest bellwether among them. As the cornerstone of global asset pricing, the long-term yield of U.S. Treasuries acts as the core "valuation denominator" for capital markets. Its sharp fluctuations and persistent instability directly drive the repricing of all types of global assets, plunging overall asset valuation and pricing systems into turmoil. This is the single biggest problem currently faced by global capital markets.
Looking back at history, rising U.S. Treasury yields have repeatedly triggered global asset systematic repricing and volatility. In 2013, the Federal Reserve signaled expectations of tapering QE, triggering the "taper tantrum". Just on the eve of the policy expectations materializing, the 10-year U.S. Treasury yield surged by 137 basis points in three months, triggering global chain shocks. Among these, the S&P 500 index pulled back by 5% in the short term, emerging market currencies depreciated by over 8% overall, global capital flowed back massively to the U.S., emerging markets experienced a double kill in stocks and bonds, and high-yield credit spreads widened markedly, leading to a rapid tightening of global liquidity.
Between 2022 and 2023, to combat persistent high inflation, the Fed initiated an aggressive rate-hike cycle, sending the 10-year U.S. Treasury yield surging from 1.5% to 4.9%, a cumulative rise of 350 basis points over 22 months. This consequently caused valuations of long-duration assets to undergo deep adjustments. During this period, the Nasdaq Index plummeted 33% for the year, the real estate REITs sector plunged 29%, and long-duration assets such as global real estate, long-term technology, and utilities underwent collective repricing, while sovereign debt default risks in emerging markets climbed sharply, leading countries such as Sri Lanka and Ghana to experience sovereign debt crises successively within this cycle.
Comparing the two historical market trends, the current 2026 bond market volatility layers on two new bearish factors, making the potential risk shock far more severe than historical cycles. First, the volume of U.S. debt has expanded dramatically compared to 2022, doubling interest-payment and deficit pressures, which significantly increases market sensitivity to volatility. Second, the core economies of the U.S., Japan, and Europe are all experiencing high debt simultaneously, leaving no global risk-free buffer zones and substantially amplifying cross-border risk resonance effects. The current market recovery is merely a short-term technical rebound, and the valuation suppression on long-duration assets has not been lifted.
Based on the current market landscape, Kung Chan sees that subsequent market trends will likely follow two marginal repair paths.
The first is "stabilizing U.S. Treasuries". This depends on the capabilities of Treasury Secretary Scott Bessent and the Fed to stabilize the supply and demand of U.S. Treasuries through policy regulation and repair global sovereign credit expectations. However, skepticism currently prevails. The U.S. structural fiscal deficit has proven to be deeply entrenched over the long term. With limited scope to cut mandatory spending, including welfare programs, defense, and industrial subsidies, and little room for near-term tax reform, addressing the deficit remains difficult.
The second is "reshaping market expectations". This requires inventing persuasive "new global macroeconomic financial theories" to reshape the market's pricing logic regarding high sovereign debt. However, the path of "new theories" is essentially a means of expectation management, which can only temporarily soothe market sentiment, while core problems such as structural interest-payment pressures and debt supply-demand imbalances continue to exist. Once external disturbances like inflation volatility or geopolitical conflicts are encountered, market doubts may heat up once again.
Overall, under the medium-to-long-term high-interest-rate environment, the sustainability of the model whereby major economies like the U.S., Japan, and Europe rely on continuous bond issuance to sustain fiscal operations is gradually weakening. Over the past twenty years of a low-interest-rate environment, low debt interest costs masked the potential hidden dangers of debt expansion. After the global interest rate center systematically shifted upward in 2022, persistently climbing interest expenditures continually squeezed fiscal space. The bond market sell-off in May 2026 itself is a concentrated release of long-term debt contradictions, and the periodic pullback in yields does not constitute a clearing of risks.
Neither "stabilizing US Treasuries" nor "reshaping market expectations" belongs to anything other than periodic optimization measures. None of these two options can remedy the structural fiscal gap. High volatility in global bond markets will become the norm in the future, sovereign debt risks will continue to dominate asset pricing, global capital markets may bid farewell to steady upward patterns, and the asset valuation center as a whole tends to shift downward.
Final Analysis Conclusion:
Long-term government bond interest rate levels of 5% or 6% are not uncommon in global historical market trends, and market sentiment since May has been somewhat exaggerated, but the world's financial markets today indeed face major issues. The main challenge is that the finances of major global economies are highly dependent on debt expansion, relying on the continuous issuance of new government bonds to fill fiscal revenue and expenditure gaps. Market doubts regarding the sustainability of mainstream bond-issuing models continue to heat up, and this situation is rather serious. The two possible paths to address this for the future are "stabilizing US Treasuries" and "reshaping market expectations".
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Xia Ri is an Industry Researcher at ANBOUND, an independent think tank.
