The Bank of Japan's interest rate hike signals stir the global bond market, and U.S. Treasury yields rise in response.

On December 2nd, the global bond market was in turmoil. The cause? The Governor of the Bank of Japan, Kazuo Ueda, dropped a bombshell—hinting at a possible interest rate hike this month.

It is important to know that the market originally expected the Bank of Japan to continue to stay on the sidelines. This sudden statement directly caused the yield on Japan's 10-year government bonds to soar to 1.879%, setting the highest closing record since June 2008. In addition, the yield on U.S. 10-year government bonds was also raised to 4.095%, considering that this figure was still hovering below 4% in the middle of last week.

Why is this matter so serious?

Because Japan is the largest overseas buyer of U.S. Treasuries, holding about 1.2 trillion U.S. dollars in U.S. government bonds. If Japan truly tightens its monetary policy, it means that domestic funds in Japan will accelerate the withdrawal from overseas assets such as U.S. Treasuries and flow back to the domestic market. This reversal in the flow of funds is sufficient to interrupt the downward trend in U.S. Treasury yields.

What Wall Street is most worried about now is this chain reaction: rising Japanese bond yields → attracting funds to withdraw from the U.S. → U.S. bond yields forced to rise → Federal Reserve's room for rate cuts being compressed.

This year, the decline in U.S. Treasury yields was originally an important driver for the Federal Reserve to restart the interest rate cutting cycle. It lowered mortgage rates and supported the stock market (after all, with low Treasury yields, investors are not satisfied with risk-free returns and turn to pursue the stock market). However, this logic may now be disrupted by a policy signal from the Bank of Japan.

The global market has added another layer of uncertainty.