Will Japan break the Treasury bond market?

**Darius Dale** (0:00)
Happy Friday out there, Team 42 It's your skipper here, Darius Dale, to present our Macro Minute for Friday, July 10th, 2026 As always, we'll start with the executive summary from today's Lead Off Morning Note, so let's dive right in. Today's key macro question is, will Japan break the Treasury bond market? The short answer is no, but it will certainly try, however inadvertently. Japan's trying represents a structurally bullish dynamic for risk assets. In terms of analytical nuance, Japan's finance minister urged pension funds to tilt their allocations increasingly towards domestic assets, lifting the yen from four-decade lows and rallying JGBs. Fielding questions about how strategic investments will benefit Japanese citizens, she made seemingly innocuous comments that could have major domestic economic and geopolitical implications because Japan's government pension fund ranks among the world's largest pensions, holding $1.8 trillion in assets, and Japan is the third largest net international investment plus economy in the world at $3.5 trillion.
Recall that Prime Minister Takiichi last month proposed a $2.3 trillion fiscal policy strategy across 14 years, with over 25 percent dedicated to AI and chips. Its scale is unmatched. The prospect of durable reflationary fiscal policy in Japan represents a durable negative demand shock for US. Treasury bonds, especially in the context of a BOJ that was recently given latitude to further normalize Japanese monetary policy in the upcoming economic and fiscal agenda. We presciently identified these dynamics roughly three years ago, amid the advent of our inaugural investing during a four-turning regime presentation, referred to our fourth turning FAQ for more details. Japan is the world's third largest international investment surplus economy. Any material moderation of its capital outflows will have a material impact on global financial markets. The 30-year high and long-term JGB yields and 40-year low in Japanese yen versus the US dollar are telltale signs that Japan requires more of its own capital to finance Prime Minister Takeiichi's ambitious fiscal policy agenda.
Japan being forced to increasingly capitalize its own sovereign debt market due to persistent reflationary fiscal policy is part and parcel of our core thesis that there is a geopolitically driven supply demand and balance in the Treasury bond market, aka paradigm A.
Europe re-militarizing, China decoupling and BRICS members generally disfavoring US dollar hegemony are key drivers of the disequilibrium as well. The trailing 10-year growth rate of global savings is among the lowest on record and well below its long-run mean. This dynamic is unlikely to meaningfully or durably improve given the ongoing shift to a multipolar world and all the added fiscal expenditures on defense and infrastructure that entails. The reversal of global capital flow dynamics, the protracted deceleration of global savings growth, and the protracted acceleration in US fiscal expenditures combine to leave the US. Treasury in a precarious position with respect to capitalizing its debt stock. Treasury Secretary Besant must cap finance nearly $12 trillion over the next 12 months, more than double the Treasury's capitalization needs just prior to COVID. The persistence and likely deepening of the geopolitically driven supply demand imbalance in the Treasury bond market is why the Fed has no choice but to continue monetizing US sovereign debt over the long term. A key reason why we believe Kevin Warsh was nominated to succeed Jay Powell's Fed chair is because he's the most credible dove in Hawke's clothing.
As always, we'll wrap up with a question from our community here, transitioning to our 42 Macro dashboard. This one's titled Mac 7
It says on a growth adjusted basis, the Mac 7s are the cheapest they've ever been in over 10 years. This is the AI driven EPS powering them ahead. Darius is saying, no, avoid Mac 7 I'm a little confused why. Rather than give my answer, I'm just going to read the answer verbatim from another member here. Says, because the Mac 7 will be a source of funds, meaning institutions will sell mega cap tech stocks to raise cash to buy other assets. Mega cap tech is the markets at the money position for a new regime. From what Darius has said, it is something to do with fundamentals, but more so to do with the nature of the new regime, liquidity, bookable gains, concentration risk, and a lot of other stuff.
So excellent answer. As an educator, it warrants my heart and brings a tear to my eye when I see the members, one, helping each other come up their own investing journey, help each other up the respective investing journeys. And when they can start answering questions to this degree, it just lets me know that I'm doing my job as an educator, and it's something I'm really thankful for this morning. So let's just quickly wrap up. Let's get a quick check in with Mac 7 here where we're at, Max. That's our doctor most signalling for Max right now. So it's still bullish. Yeah, obviously, pretty, pretty low, pretty, pretty strong off the highs. But you know, so in an absolute sense, you know, Mac 7 is fine. But in a relative sense to other factors in the market, you know, it's been lagging pretty, pretty tremendously in recent months. And that's exactly what we call for when we outline the theme last fall. So no change to the theme. It's not going to go anywhere in a linear straight line, particularly if we go into.