Rising Yields in Developed Nations Surge, Potential Impact on Indonesia

A trend of rising yields on government bonds is resurfacing in several developed nations. Pressure is particularly evident in the US and Japanese bond markets, with yields for several tenors reaching their highest levels in decades.

According to Refinitiv data, the 1-year US Treasury yield closed up 3.8 basis points (bps) to 4.796% on Tuesday (1/9/2026), up from 4.758% in the previous session. This position is the highest since January 2025. Meanwhile, the 30-year US Treasury yield rose 1.8 bps to 5.267%, remaining near its highest level in 19 years, or since 2007.

A sharper increase occurred in Japan. The 10-year Japanese Government Bond (JGB) yield rose 5.1 bps to 2.992%, even briefly breaching the 3% mark during intraday trading. This level is the highest since September 1996, approximately 30 years ago. For shorter tenors, the two-year JGB yield rose 4.8 bps to 1.799%, sitting near its highest level in 31 years.

This increase has not been limited to a single day. Since the end of 2025, the 10-year US Treasury yield has surged by 64.3 bps, while the 30-year tenor has increased by 43.7 bps. During the same period, the 10-year JGB yield soared by 92.2 bps, and the two-year yield increased by 62.5 bps.

It is important to note that yields move inversely to bond prices. When bond prices fall due to selling pressure, yields increase. Rising yields also indicate a higher rate of return demanded by investors to hold government debt.

What is causing the current rise in bond yields? The increase in US and Japanese government bond yields is primarily driven by three factors: inflation concerns, expectations of interest rate hikes, and the massive financing needs of governments.

Inflation concerns have resurfaced following the escalation of conflict in the Middle East, which has driven up oil prices. Investors are subsequently demanding higher yields due to fears that inflation will erode the real returns on the bonds they hold.

Bridgewater Associates founder Ray Dalio assesses that the current rise in US Treasury yields is not merely short-term market volatility. According to him, the rise in long-term yields amidst expanding debt issuance and weakening investor demand is showing a classic pattern in the government debt cycle.

“When demand cannot keep up with the supply of debt, interest rates must rise significantly, which then puts pressure on markets and the economy,” Dalio wrote in a LinkedIn post. Dalio suggests the alternative is for central banks to add liquidity by purchasing government bonds. While this could curb rising yields, it risks weakening the currency and increasing inflation.

“All these conditions lead to a government debt crisis, which could create something akin to a heart attack for the economy,” Dalio continued. Dalio estimates the US budget deficit this year could reach approximately US$2 trillion, while its debt interest burden is hitting US$1 trillion. This massive deficit forces the government to issue more US Treasuries to meet financing needs.

If the supply of debt continues to grow faster than investor demand, governments must offer higher yields. This condition risks increasing the interest burden and absorbing more of the national budget. The US government must also compete with technology companies that are issuing large amounts of debt to build data centres and artificial intelligence (AI) infrastructure.

Pressure increased after US Federal Reserve Governor Kevin Warsh signalled that interest rates could still be raised if inflation does not promptly return to 2%. These expectations have prompted investors to sell existing bonds, causing prices to fall and yields to rise.

In Japan, the surge in yields is primarily driven by expectations of a Bank of Japan (BOJ) interest rate hike. High inflation and a weakening yen have led the market to anticipate that the BOJ will accelerate its monetary tightening policy. The market also fears Japan’s fiscal condition. Prime Minister Sanae Takaichi’s government plans to increase investment in several strategic sectors, while government debt has exceeded 200% of Gross Domestic Product (GDP). These spending plans are feared to increase bond issuance. Simultaneously, the BOJ is reducing its JGB holdings, meaning support from central bank demand is diminishing.

Should we be worried? History shows that rapid increases in government bond yields can spread to various markets and become problematic. One example occurred in 2013 during the event known as the ‘taper tantrum.’ At that time, the 10-year US Treasury yield surged from around 2% in May to 3% in December 2013 after the Fed signalled it would reduce bond purchases. This spike triggered capital outflows from emerging markets, pressured asset prices, and weakened currencies. The Rupiah even plummeted by approximately 17% in just five months.

Another example occurred in the UK in 2022. The 30-year UK government bond yield surged by more than 160 basis points in just three days. This spike caused several pension funds to struggle to meet their liabilities and forced them to sell bonds, further intensifying market pressure. The Bank of England eventually intervened by purchasing bonds to restore market conditions.

These two events demonstrate that the risk lies not only in high yields but in the speed of their increase. If it occurs suddenly, rising yields can bring significant impacts, such as a decline in the value of bond investments.