The signal of Japan's interest rate hike has triggered concerns in the U.S. market about "bloodletting," and the prospects for the Fed to cut interest rates may change.

On 2 December, a tightening of monetary policy in Japan, the largest foreign lender of US bonds, could trigger a return of domestic funds from overseas assets such as US bonds, interrupting the downward trend in US Treasury yields and adding uncertainty to global markets. On Monday, global government bond yields broadly climbed (yields rise when bond prices fall) after Bank of Japan Governor Kazuo Ueda hinted at a possible rate hike later this month. This statement came as a surprise to investors, who had expected the Bank of Japan to remain on hold. Kazuo Ueda's comments pushed Japan's 10-year government bond yield to 1.879% – the highest closing level since June 2008. The US 10-year Treasury yield climbed to settle at 4.095%, up from just below 4% in the middle of last week. Wall Street fears that a rise in Japanese bond yields will attract funds out of U.S. investment and trigger a climb in U.S. Treasury yields. Japan is the largest foreign creditor of the U.S. government, holding about $1.2 trillion worth of U.S. Treasuries as of September. The decline in Treasury yields this year has been a catalyst for the Fed to start cutting rates again, driving down mortgage rates and pushing up equities – which tend to benefit from lower Treasury yields because investors are no longer able to earn as much of a risk-free return by simply holding them to maturity. The signal of tightening monetary policy in Japan has also raised concerns about the prospect of the Fed cutting interest rates, and the climb in US Treasury yields will be a hindrance to rate cuts.