Investors dump bonds globally on US credit downgrade

Global bond markets are unravelling as investors are no longer willing to turn a blind eye to the fiscal recklessness building across the developed world, led by the United States.

The simultaneous sell-off in US Treasurys, German bunds, and Japanese government bonds is not a temporary squall. It’s the clearest signal yet that the great age of denial around sovereign debt risk is ending.

This moment was a long time coming. The latest US credit downgrade only formalised what many already suspected: the federal government has neither the appetite nor the political alignment to rein in deficits.

But it’s Trump’s latest tax package – pitched as bold reform but carrying a price tag of trillions – that’s pouring accelerant on already smouldering concerns. These are not ordinary policy tweaks, they ‘re part of a pattern that markets can no longer afford to ignore.

Bondholders are no longer asking if fiscal policy will catch up with them – but how fast, and how bad the damage might be.

This is why the 30-year US Treasury yield has pushed firmly back above 5%. It’s why the 10-year has surged in a matter of days. This is a structural repricing of risk. Investors are demanding compensation for holding debt issued by a government that seems intent on spending heavily, even as borrowing costs rise and creditworthiness slips.

The consequences for global investors are enormous. US Treasurys are the bedrock of international finance, used to price everything from corporate bonds to mortgages to emerging market debt. When confidence in that foundation cracks, the ripple effects stretch everywhere.

Investors who once used Treasurys as ballast are now reassessing that logic, especially on the long end of the curve. That shift alters the calculus for portfolio construction, risk management, and asset allocation across the board.

It’s tempting to dismiss this as a uniquely American problem. It isn’t. Europe is now following a similar path.

Germany’s historic commitment to fiscal prudence is crumbling under the weight of military rearmament and the formal suspension of its constitutional debt brake. German bund yields are rising in tandem with Treasurys, not in reaction to them. The message from markets is that fiscal deterioration, once considered a concern only for the periphery, now sits squarely at the core.

Japan’s story is more complex, but no less revealing. A surge in long-end yields, driven in part by changing regulatory behaviour among domestic institutions, also reflects a deeper reckoning. The Bank of Japan, long the world’s most dovish central bank, is inching away from its ultra-loose stance just as its government faces widening fiscal challenges.

This is the worst of both worlds for bondholders: declining monetary support and growing debt loads. It’s a signal that Japanese investors may finally stop soaking up US Treasurys at a time when Washington needs them most.

In this environment, the old safe havens aren’t safe. The idea that sovereign bonds are inherently low-risk has collided with a new fiscal reality: the supply of debt is growing fast, while the political will to manage it is vanishing.

Central banks may cut rates in the future, but if long-term debt holders are unconvinced by the fiscal story, yields will stay elevated — with consequences for everything from equity valuations to real estate pricing to currency flows.

There are exceptions, for now. India and China, more insulated by capital controls and domestic demand, have seen bond yields fall even as the rest of the world sees them rise. But these are anomalies, not indicators of stability. Global capital doesn’t rotate endlessly into safer yield — it withdraws when core confidence cracks.

For international investors, the message is clear: rethink your assumptions. If US Treasurys are no longer sacrosanct, if bunds and JGBs are no longer ballast, then every portfolio model needs to be re-examined.

Duration risk is no longer dormant, fiscal risk is no longer peripheral, and diversification, long a passive process of blending developed market bonds with a handful of growth assets, now demands a more active and discriminating approach.

We are witnessing the unravelling of a decades-long consensus – that large, developed nations can borrow freely without consequence.

That illusion is being priced out, and portfolios that fail to adapt will be left behind. Investors must confront a new era of government debt markets, one defined not by safety, but by scrutiny.

The views, information, or opinions expressed in the interviews in this article are solely those of the author and do not represent the views of Stockhead.

Stockhead does not provide, endorse or otherwise assume responsibility for any financial advice contained in this article.

Nigel Green, is the group CEO and founder of deVere Group, an independent global financial consultancy.