In the recent performance of financial markets, although the frequent trade policy-related remarks by the US high-level officials have attracted widespread attention, the core force driving the structural changes in the global interest rate curve comes from the growing concerns about the fiscal sustainability of various countries. Analysts believe that the latest developments in the UK and Japan have accelerated the emergence of this concern, which in turn has had a far-reaching spillover effect on the global bond market.

The UK and Japan are under fiscal pressure, and long-term government bond yields soared

The annual public risk and sustainability report released by the Office for Budget Responsibility (OBR) of the United Kingdom bluntly stated that the current fiscal situation is no longer capable of coping with new shocks. This report was interpreted by the market as the near exhaustion of the UK's fiscal flexibility, triggering a sell-off of long-term British bonds, with the 30-year government bond yield soaring by 6.3 basis points. At the same time, the uncertainty of Japan's political situation before the Senate election on July 20 has also exacerbated market concerns about its high debt risk. The yield on Japan's 30-year government bonds rose by 9 basis points, and the spread structure further steepened, highlighting the signal of long-term fiscal pressure.

In this situation, the German government bond market was also affected, with the 2-year and 30-year yields rising by 3.5 and 5.4 basis points respectively. The rise in long-term interest rates is seen as a direct response of the market to the deterioration of sovereign credit conditions, especially against the backdrop of weak global economic growth expectations.

U.S. market reaction was mild, but alarm bells were ringing

Although the US Office of Budget and Budget released its Fiscal Status Report (OBBB) on the same day, the overall market reaction was relatively mild, with the full curve yield fluctuation not exceeding 2 basis points. This reflects that the market is still taking a wait-and-see attitude towards the US fiscal situation. However, with the continuous expansion of the fiscal deficit and frequent disputes over the debt ceiling, analysts pointed out that the United States is gradually approaching the boundary of fiscal policy operation.

In this context, the US intends to impose a 50% tariff on copper imports, and the pharmaceutical industry may even face a new tax rate of up to 200%. At the same time, an additional 10% tariff will be imposed on goods from some emerging market countries. Analysts believe that although these measures will theoretically promote imported inflation, judging from the current market performance, their actual impact is limited and price expectations are still relatively mild.

Exchange rate structure shows differentiation, and risk aversion demand is insufficient

Affected by political and fiscal risks, both the pound and the yen are under pressure. The euro/pound cross rate rose to 0.863, reflecting the market's weakening risk aversion to British assets. The yen continued to weaken against the backdrop of weakening risk aversion properties, with the dollar/yen trading around 146.6 and the euro/yen rising to 171.9. Analysts pointed out that the current market lacks a systematic risk aversion drive and adopts more technical short-term operation strategies.

At the same time, the US dollar index (DXY) strengthened slightly to 97.52, maintaining a range-bound trend. EUR/USD was basically flat at 1.1725, reflecting that the short-term game in the foreign exchange market is still ongoing, but there has been no directional breakthrough.

The interest rate market turns to fiscal fundamentals and is wary of the debt squeeze effect

At present, the market's attention is shifting from short-term trade games to medium- and long-term fiscal sustainability. The situation in the UK and Japan shows that in an environment of high debt and low growth, the rapid tightening of fiscal space will continue to suppress the government bond market. Germany, as a representative of sound fiscal policy, has also seen its curve steepen, further indicating that the market is reassessing medium- and long-term sovereign credit risks.

It is worth mentioning that the United States will conduct a $39 billion medium- and long-term bond auction today. This is the first sale after the OBBB and an important forward-looking reference for tomorrow's 30-year Treasury auction. Analysts generally believe that this will become an important window for evaluating the market's pricing of U.S. debt risks, especially in an environment where the fiscal deficit continues to expand, and the bidding response will be of great significance.