Japan is set to raise interest rates, causing global government bonds to drop and risk assets to adjust across the board

The hawkish signals from the Bank of Japan on Monday triggered a global bond market sell-off, pushing yields on government bonds in major economies higher and causing a chain reaction for high-risk assets such as Bitcoin.

Bank of Japan Governor Kazuo Ueda strongly hinted at a rate hike in December during a speech in Nagoya on December 1, stating that he hopes to raise rates to 0.75% before discussing further actions. This statement triggered a surge in Japan's two-year government bond yield above 1%, the first time since 2008.

The turbulence in the bond market quickly spread from Tokyo to Washington and Frankfurt. The yield on the U.S. 10-year Treasury rose by 0.08 percentage points to 4.09%, marking the largest single-day increase in a month; the yield on Germany's 10-year government bond increased by 0.06 percentage points to 2.75%. The yen appreciated approximately 0.6% against the dollar to 155.3 yen.

The rise in yields on safe-haven assets put pressure on risk assets. Bitcoin plummeted 5.5% on the day, with a cumulative decline of over 20% in the past month. U.S. tech stocks led the decline, with the Nasdaq Composite Index closing down 0.4% and the S&P 500 Index falling 0.5%, while cryptocurrency-related stocks faced significant losses.

Bank of Japan Clearly Signals Rate Hike

In his speech, Kazuo Ueda made a series of key statements. He clearly indicated that the Bank of Japan "will make the right decision regarding interest rates at the December meeting," and expressed the desire to further elaborate on the future rate hike path after raising rates to 0.75%.

The central bank governor also acknowledged that "it is difficult to say how far we are from the neutral rate," but emphasized that even with a rate hike, the financial environment will remain accommodative. The market interpreted this series of statements as a strong hint at the end of ultra-loose monetary policy. Following the speech, both stocks and bonds in Japan fell.

The yield on Japan's 10-year government bond rose by 0.07 percentage points to 1.87% on the day. This year, Japan's bond market has experienced severe sell-offs, with the 10-year yield having risen nearly 0.8 percentage points, reflecting multiple pressures from expectations of interest rate normalization, increased government spending, and declining demand for long-term bonds from buyers such as life insurance companies.

Butterfly Effect Impacting Global Bond Market

The shift in Japan's interest rate expectations has sparked a chain reaction in the global fixed income market. Matt Miskin, co-chief investment strategist at Manulife John Hancock Investments, stated: "After the Bank of Japan released hawkish signals for a December rate hike, global bonds are feeling the butterfly effect."

As a global pricing benchmark for trillions of dollars in assets, the yield on the U.S. 10-year Treasury recorded its largest single-day increase in a month. A key concern for the market is that as yields on domestic Japanese bonds rise, Japanese investors may withdraw funds back to the domestic market, reducing demand for foreign government bonds.

Michael Metcalfe, head of macro strategy at State Street Markets, warned: “The clearer the signs of interest rate normalization in Japan, the higher the likelihood that Japanese investors will withdraw from foreign bond markets or at least reduce their purchases of foreign bonds, which will weaken a key source of international financing at a time when sovereign debt issuance is surging

The closing of spread trades intensifies selling pressure

The impact of bond sell-offs on risk assets is transmitted through multiple channels. When investors can obtain higher yields from safe-haven assets such as Japanese and U.S. government bonds, speculative assets typically weaken.

The so-called closing of spread trades has also intensified the selling pressure on risk assets. This type of trade refers to investors borrowing in low-yield currencies like the yen and then investing in higher-yielding assets. Jasper De Maere from the cryptocurrency trading firm Wintermute stated: “Japan's low interest rates have facilitated spread trades, and now these trades are being closed, leading to a sell-off of all risk assets.”

Bitcoin fell 5.5% in a single day, and cryptocurrency-related stocks faced the heaviest selling pressure. The stock price of digital asset exchange Coinbase dropped 4.8%, while the stock price of Bitcoin-holding company Strategy fell over 3%.

Wall Street tech stocks also did not escape unscathed. The tech-heavy Nasdaq Composite Index led the major indices lower, reflecting a broad contraction in market risk appetite