As global bond yields spike amid the latest Middle East tremors, Japan is at the epicenter.

Surging US Treasury rates are getting most of the attention – even from geopolitical observers like Eurasia Group's Ian Bremmer, who notes that the "Treasury will struggle to hold down long-term yields, as Congress has no appetite for fiscal consolidation and the Federal Reserve is moving in the opposite direction."

Last week, Treasury Secretary Scott Bessent's department had to pay 4.683% to sell $42 billion of 10-year notes – the highest yield since the 2007 eve of the global financial crisis.

The most recent 30-year auction drew 5.216%, the highest since 2001, and rates on outstanding 30-year Treasuries hit 19-year highs. Global investors are demanding more to finance Washington's nearly $40 trillion debt. The pressure is rippling outward, pushing yields higher from Canada to the Eurozone to the UK to South Korea to Japan.

"Global bond markets have caught on fire," says Brookings Institution economist Robin Brooks. "Reckless fiscal policy is catching up with governments." At this point, he says, "it should be clear that something very unusual is going on."

Barclays strategist Anshul Pradhan adds a telling detail: three separate US economic releases this month pointed toward lower yields – yet long-end yields rose anyway. The pressure, he says, is now strong enough to override individual data surprises. Investors are combing the debt markets for cracks, wary of a repeat of the 2023 regional-bank panic sparked by Silicon Valley Bank's collapse.

Nowhere is the pressure building faster than in Japan – and given the Bank of Japan's role as a kind of global ATM, a Japanese bond crisis could be the most dangerous of all.

The yen has been testing 40-year lows as Japanese government bond (JGB) yields climbed to a 29-year high of 2.8%. Tokyo's crushing debt load is one culprit; another is the sense that the BOJ is behind the curve as stagflation risk builds. That's pushed Prime Minister Sanae Takaichi to signal she'd accept a BOJ rate hike as soon as September 16 – a striking reversal from last October, when she called the idea of raising rates "stupid."

Her party has come around to the view that a weak yen is importing inflation too fast. The BOJ's own research team just cut its GDP forecast for the current fiscal year to 0.9%, from 1.3% – less than half its 2.2% inflation forecast for the same period. Inflation risk keeps skewing higher as the Iran war drags on.