By Alun John, Yoruk Bahceli and Amanda Cooper
LONDON, Jan 20 (Reuters) - A surge in Japan's borrowing costs to record highs rippled out across major bond markets on Tuesday, just as markets fretted over tensions related to Greenland, highlighting their vulnerability to increased fiscal spending and high debt.
Ten-year Japanese government bond yields have surged almost 19 basis points (bps) in two days, the sharpest rise since 2022, while 30-year yields posted their biggest daily jump since 2003 on Tuesday
as investors brace for increased government spending.
Prime Minster Sanae Takaichi called a snap election on Monday and is running on a platform of stimulus.
"If there is a strong mandate following the election, that could open the door to more fiscal spending," said Seema Shah, chief global strategist at Principal Asset Management.
"It pulls a lot of global bond markets into a difficult story about debt and you can see that in the rise in borrowing costs."
WORRIES OVER GREENLAND, THREAT OF MORE TARIFFS
Bond investors were also grappling with U.S. President Donald Trump's tariff threats against European allies over Greenland, which may raise expectations that Europe will have to ramp up defence spending further through even more bond issuance.
Talk of a 'Sell America' trade has also resurfaced, adding to selling pressure on Treasuries.
Danish pension fund AkademikerPension said on Tuesday it was planning to sell its U.S. Treasury holdings by the end of the month, worth some $100 million.
U.S. 30-year Treasury yields jumped around 7 basis points to at 4.91% as U.S. markets reopened after Monday's holiday.
Over the last two trading days, they've risen by around 12 bps, their biggest two-day increase since last May, when China-U.S trade tensions flared.
The difference between two-year and 30-year yields, one reflection of investor concern about long-term government finances, were set for their biggest one-day rise since August, yet dwarfed by the 19-bps blow-out in a day during last April's Liberation Day selloff.
Kenneth Broux head of corporate research FX and rates at Societe Generale said "a perfect storm" was driving Treasuries, including the "carnage" in JGBs, tariff threats and momentum, noting that 10-year yields closed above 4.20% on Friday -- a "technically important" level.
WHAT HAPPENED TO THE CALM?
The bonds selloff ends weeks of relative stability in big markets outside of Japan that have faced pressure over the past year from concern about high debt.
Benchmark German 30-year bonds climbed around 6 bps to 3.52% in their biggest selloff since September.
UK 30-year yields, which often rise or fall more than peers, were up around 7 bps at 5.23%, set for their largest daily increase since early November.
In Europe, tensions over Greenland only highlighted spending pressures, analysts said.
"It again means that Europe needs to do more on defence," said Barclays head of euro rates strategy Rohan Khanna.
"Which the market is going to say: look, it eventually means more issuance and more debt supply and hence weaker long-end bonds."
He added that tariffs would hurt growth, which was supportive for shorter-dated bonds.
European bond markets were also sensitive to the JGB selloff because Japanese investors, big buyers of foreign bonds, might be tempted to move money into higher Japanese yields.
"The question is: where are those flows going to come from now? Are they going to come more from the U.S. or more from Europe? And given the current geopolitical landscape, that could amplify the spillover to the U.S. a bit more," said ING senior rates strategist Michiel Tukker.
"You could argue it's safer to stay in German Bunds than U.S. Treasuries."
(Reporting by Alun John, Amanda Cooper and Yoruk Bahceli, Writing by Dhara Ranasinghe; Editing by Bernadette Baum)
