DB-Fixed Income Chart Of The Day Separating the wheat from the chaff-20250529

The long end of bond curves has come under pressure in most G10 countries,with the US and Japan being notable underperformers. However, there areimportant differences between these two markets.

Today's charts present evidence that there are greater dislocations in JGBs thanin USTs, especially at the long end of the curve. This suggests that the long-endJGB sell-off is more likely to be technically driven.

On the other hand, the long-end UST sell-off is more likely to be fundamentallydriven. Indeed, as we have documented in our work on twin deficits, the externalposition tends to be a better predictor of sovereign risk than the fiscal position.While Japan has a very high government debt-to-GDP ratio, its external positionis very robust. In contrast, the US has a lower debt-to-GDP ratio but a weakexternal position, which is unlikely to improve absent a material fiscal tightening.Thus, the pressure on the long end of the UST curve is likely fundamentally driven,as current policies are eroding the USD's "exorbitant privilege" and leading non-domestic investors to require a higher risk premium to hold US assets.