Nikkei falls 2.7% as bond selloff pressures AI trade

The Nikkei Stock Average fell 2.7% to 65,604.25, tracking Wall Street losses after a global bond selloff pushed yields to multi-year highs.

"Equity investors have finally started to respond by going a bit defensive," Fawad Razaqzada, market analyst at FOREX.com, said. "The overcrowded AI trade is losing momentum as yields press higher."

Among the worst performers on the Nikkei, Renesas Electronics dropped 8.2%, Fujikura slipped 7.2%, and Sumitomo Electric Industries fell 7.65%. The dollar traded at 159.46 yen, compared with 159.73 at Tuesday's Tokyo close.

The decline extended across Asia. South Korea's Kospi lost 1.6% to 6,869.83, with investors selling local shares to escape wild swings linked to the AI boom. Australia's S&P/ASX 200 edged down less than 0.1% to 9,070.00, while Hong Kong's Hang Seng gained 0.2% to 25,513.65 and the Shanghai Composite added 0.2% to 3,990.30.

US 30-Year Yields Touch 5.32%, Highest Since 2007

The selloff is driven by a global repricing of long-dated government debt. Thirty-year US Treasury yields touched 5.32%, the highest since 2007, while Japan's 10-year borrowing costs approached 3%, a three-decade high. German 10-year Bund yields traded at 2011 levels, and French borrowing costs hit their highest since 2008. In the UK, 30-year gilt yields are approaching 6%.

The bond selloff reflects multiple structural forces. Government debt levels in developed economies are reaching unsustainable thresholds, with the US debt pile nearing $40 trillion. The war in Iran is dragging on, pushing oil prices above $90 a barrel and fanning inflation worries. Meanwhile, massive borrowing by technology companies to fund AI infrastructure is competing with government bond demand.

"Investors are losing patience with fiscal profligacy," said Jonas Goltermann, chief markets economist at Capital Economics. "The fiscal outlook in several major economies is problematic, and politicians have shown little appetite for addressing the issue."

The yield surge has implications beyond equities. Higher borrowing costs feed through to corporate and consumer loans, potentially squeezing households and companies. The New York Fed estimates the term premium — the extra compensation investors demand for lending to the government for 10 years — at around 80 basis points, close to its highest level in 12 years.

For Japan, the dynamics are particularly acute. The nation imports almost all its oil, making it vulnerable to rising energy prices. Expectations that the Bank of Japan could hike rates as early as September have pushed 10-year JGB yields to three-decade highs. "Japan was meant to be the anchor for global rates, and the risk that JGB yields move higher raises the risk that global duration reprices," said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities.

The AI trade that powered equity gains is now facing headwinds. "The beneficiary base from AI investment has broadened," Masashi Akutsu and Tetsuhiro Tokuyama said in a report for BofA Securities. "Demand spread across a wide range of industries, including semiconductor production equipment, power equipment, machinery, electronic components, and materials."

But with yields pressing higher, high-multiple technology names are most vulnerable. The Nikkei's worst performers — Renesas, Fujikura, and Sumitomo Electric — are all semiconductor and electronics companies that benefited from the AI infrastructure buildout.

On Wall Street, the S&P 500 fell 0.5% but remains near its all-time high set Thursday. The Dow Jones Industrial Average dropped 272 points, or 0.5%, and the Nasdaq composite slipped 0.3%.

Some investors see opportunity in the repricing. "Where we have seen more value created and that we like a little bit better would be the long end, particularly in real yields," said Kelsey Berro, portfolio manager at JPMorgan Asset Management. "We do believe ultimately correlations would be supportive for the portfolio if you were to see a little bit more of a wobble in risk assets."

This article is for informational purposes only and does not constitute investment advice.