By Qaiser Nawab
Chairman, Belt and Road Initiative for Sustainable Development (BRISD)
The U.S. financial markets received a sharp jolt on May 21 when a 20-year Treasury bond auction recorded abysmal demand, sending yields surging past 5%. The bid-to-cover ratio—an important gauge of investor interest—fell to 2.46, sparking a “triple sell-off” across American equities, government bonds, and the U.S. dollar. These tremors were not isolated. A similar pattern was observed in Japan, where the 20-year Japanese Government Bond (JGB) auction saw its weakest participation in years, triggering a spike in yields and shaking investor confidence.
What unfolded across these two of the world’s largest economies is not merely a coincidental lapse in investor appetite—it is symptomatic of deeper global liquidity contractions, systemic risk accumulation, and the fragility of post-pandemic monetary normalization. It calls into question whether global financial markets are prepared for the consequences of synchronized tightening by major central banks and an overleveraged sovereign debt ecosystem.
A Shift from Abundance to Austerity
Since mid-2022, the world’s major central banks—the Federal Reserve, European Central Bank, Bank of Japan, and Bank of England—have moved from a policy of quantitative easing (QE) to quantitative tightening (QT), a reversal of extraordinary stimulus measures deployed during the pandemic. Balance sheet contractions, designed to tame inflation, have significantly reduced systemic liquidity.
Data shows that the combined balance sheets of these four central banks have fallen as a percentage of GDP by anywhere from 12 to 29 percentage points from their 2022 peaks. Liquidity indicators for the same institutions show similar declines. The financial world has, in essence, been asked to wean itself off easy money—without necessarily adjusting its risk appetite or leverage structures.
This structural shift is occurring at a time when sovereign debt levels are soaring. In the United States, the volume of tradable Treasury securities has jumped from $16.7 trillion in 2019 to over $28.5 trillion today—a staggering 71% increase. Meanwhile, U.S. equity markets have grown even more rapidly, with total market capitalization surging by more than 80% over the same period, far outpacing the 35% rise in nominal GDP. The implications are clear: asset valuations are increasingly untethered from economic fundamentals, held up more by liquidity than by productivity.
The Yen’s Cross-Border Reverberations
Japan’s role in this liquidity puzzle deserves special scrutiny. Long known for its ultra-loose monetary policy, Japan has historically served as a “funding currency” in global financial markets, thanks to its near-zero interest rates and expansive liquidity conditions. However, that landscape is rapidly changing. The Bank of Japan has exited its yield curve control (YCC) regime and allowed JGB yields to rise in response to persistent inflation. The result: domestic investors are re-evaluating their foreign holdings, including U.S. Treasuries.
As Japanese insurers, pensions, and other institutions face tighter domestic liquidity and more attractive domestic yields, they may repatriate capital previously invested in dollar-denominated assets. This process can intensify pressure on U.S. bond markets, particularly long-duration Treasuries. It is already evident in trading patterns; that the dollar has consistently weakened during Asian hours since April, reflecting foreign investors’ waning appetite for U.S. financial instruments.
The U.S. Debt Deluge
Even more concerning is the fiscal trajectory of the United States. With the political impasse around the debt ceiling recently resolved, the U.S. Treasury is expected to issue over $1.2 trillion in net new debt between July and September alone. This supply glut, aimed at replenishing the Treasury General Account (TGA) and covering deferred liabilities, will exert significant upward pressure on yields—potentially pushing the 10-year note closer to 5% or beyond.
The implications of such aggressive issuance during a period of tightening liquidity cannot be overstated. Investors will demand higher yields to absorb the flood of supply, which in turn raises borrowing costs across the economy, including for households and corporations. Furthermore, should long-term rates spike too quickly, it could destabilize not only the bond markets but also related credit and derivatives markets, sparking margin calls, forced liquidations, and contagion risks.
Systemic Risks and the QE Dilemma
The recurrence of “triple sell-offs”—in equities, bonds, and currency—is a worrying signal. Such synchronized declines are often symptomatic of systemic stress, where liquidity dries up across asset classes and investors rush for the exits in search of safety. This kind of market behavior was last witnessed during the early pandemic panic in March 2020, and it forced the Federal Reserve into launching massive QE programs.
Should the current trajectory continue unchecked, the Fed may be forced to pivot once more—either by halting QT or by restarting QE in some form to stabilize market functioning. This, however, brings its own set of dilemmas: monetary easing may arrest financial volatility but would likely rekindle inflationary pressures, undermining the very purpose of QT.
Broader Global Implications
For emerging markets, these trends are more than just market noise. Higher U.S. yields typically strengthen the dollar, raise global funding costs, and increase capital flight from emerging markets. Projects reliant on external financing—especially infrastructure, green energy, and digital connectivity initiatives—may face severe funding constraints.
Moreover, if Japanese institutions continue to unwind foreign positions, it could depress asset values worldwide, sparking a cascading effect on sovereign funds, pension schemes, and private capital allocations. The cumulative impact would likely be a slowdown in capital flows to the Global South—at precisely the moment when global cooperation is needed to tackle climate change, development disparities, and geopolitical fragmentation.
The recent weak auctions of U.S. and Japanese government bonds are early warning signs of a fragile financial ecosystem under strain. The interplay of tighter liquidity, record debt issuance, shifting funding dynamics, and rising geopolitical uncertainties is creating a dangerous cocktail for global stability.
Addressing these risks will require more than temporary market interventions. It demands a coordinated policy rethink across major economies—one that balances inflation control with financial stability and reorients capital toward long-term, inclusive development. Without such foresight, the world could be lurching toward another era of reactive crisis management—this time without the buffer of easy money.
About Author:
Qaiser Nawab is Chairman of the Belt and Road Initiative for Sustainable Development (BRISD), an international climate and economic cooperation expert, and a frequent participant at UN and G20 forums. He can be reached at qaisernawab098@gmail.com
