By Martin Baccardax

Yields on U.S. Treasury bonds edged higher early Monday, blunting gains for stocks and weighing on the dollar, as traders and investors contemplate a host of pressures that could test the market's recent calm over the coming weeks.

Developments from Tokyo to Beijing to London and Washington have the potential to send yields higher. Wall Street is watching.

Sunday's national elections in Japan delivered a sweeping electoral mandate for Prime Minister Sanae Takaichi and her Liberal Democratic Party, which captured the largest share of seats in the lower house of parliament since World War II. That is likely to add upward pressure to Japanese government bond yields because Takaichi's aggressive fiscal policies require more debt issuance, which likely will test investors' patience regarding Japan's precarious fiscal position.

"The problem with short term Keynesian policies is that it never lasts," said independent economist and market strategist Peter Bookvar. "Policy permanency is a more effective driver of long-term economic growth, but we'll see. She is a political rock star in Japan and will have free rein for now."

Changes in yields on JGBs will be crucial for U.S. Treasury markets, because Japanese yields have been ultralow for decades. As they rise, yields elsewhere, including in the U.S. Treasury market, are also being pushed higher.

Also during the weekend, Bloomberg reported that regulators in Beijing are instructing financial entities to pare back their holdings of Treasury debt amid concern that they have too much of their assets in U.S. securities.

While China has been reducing its Treasury holdings at the state levels since 2013 as part of a broader effort to become less reliant on the U.S. dollar, it still owns around $682 billion in U.S. government debt. That makes it the U.S.'s third-largest creditor, behind the U.K. and Japan.

In Britain, meanwhile, Prime Minister Keir Starmer is facing his sternest test since taking office in 2024 following the resignation of Peter Mandelson as U.K. ambassador to the United States in connection with his ties with disgraced sex trafficker Jeffrey Epstein.

Should Starmer be forced to resign, investors worry that a new leader for the Labour Party could be compelled to push forward extra fiscal stimulus to thwart an electoral challenge from the nationalist Reform Party. It has a commanding lead in opinion polls.

"If [the current government leaders] are replaced by a new left-leaning top team that weakens the fiscal guardrails and promises big increases in public spending and borrowing, there could be a bigger spike in 10-year yields, perhaps to above 5.00%, and a bigger fall in the pound," said Ruth Gregory, deputy chief U.K economist at Capital Economics.

In the U.S., investors were also unsettled by remarks from Kevin Warsh, President Donald Trump's nominee to lead the Federal Reserve, calling for a new pact between the central bank and the Treasury. It isn't clear what that agreement might bring, but it could mean the Fed would be more reluctant to intervene if the bond market came under stress.

Warsh has said he wants to reduce the Fed's $6.6 trillion balance sheet, which would mean less support for government-bond prices, while markets expect that he will also accede to Trump's demand for a lower fed-funds rate. That combination of potential policies has made bond traders wary of artificially low short-term Treasury yields and higher longer-dated ones. Higher longer-dated yields could slow down the economy and add to concern about inflation.

Developments in the market for corporate bonds can't be ignored, either, particularly the plans for artificial-intelligence investment spending disclosed in last week's Big Tech earnings reports. The four biggest hyperscalers -- Microsoft, Meta Platforms, Amazon.com, and Google -- are expected to deploy around $650 billion in capex this year. An increasing share of that will be funded in the bond market.

Google, in fact, reportedly unveiled plans for a $15 billion sale of high-grade debt on Monday, following a well-received issue of $25 billion in new debt from Oracle last week.

All of these pressures are likely to be in evidence this week as the Treasury conducts three important bond auctions, including a $42 billion sale of benchmark 10-year notes, over the next four days.

Wednesday's 10-year auction will also come just hours after the Bureau of Labor Statistics publishes its delayed January jobs report. Analysts expect it will show a net gain of 80,000 new hires and a steady unemployment rate of 4.4%. A key January inflation report follows on Friday.

Benchmark 10-year notes were trading at 4.211% in late morning, up a modest 2 basis points, or hundredths of a percentage point, from Friday's close. Thirty-year bonds were marked 2 basis points higher at 4.863%.

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 09, 2026 11:41 ET (16:41 GMT)

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