ORLANDO, Florida, May 20 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

U.S. assets in the red

It was a sobering day for U.S. assets on Tuesday, with Wall

Street, the dollar and longer-dated Treasuries all declining as

investors took a breather to digest last week's U.S. sovereign

credit downgrade and the latest twists in President Donald

Trump's efforts to push his sweeping tax-cut bill through

Congress.

The general fiscal health of developed economies and rise in

long-term yields more broadly are top of investors' minds, and

the most significant move in global markets on Tuesday was

Japan's 30-year yield hitting a record high. More on that below,

but first, a roundup of the main market moves.

I'd love to hear from you, so please reach out to me with

comments at [email protected]. You can also

follow me at @ReutersJamie and @reutersjamie.bsky.social.

Trading Day is also sent by email every weekday morning.

Think your friend or colleague should know about us? Forward

this newsletter to them. They can also sign up here.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. A junk-rated U.S. Treasury? Markets 'care' about

that:

Mike Dolan

2. Trump visits Capitol to try to mend U.S. House

Republican rifts on tax bill

3. BOJ urged to boost bond buying in wake of spike

in

super-long yields

4. China cuts key rates to aid economy as trade war

simmers

5. With U.S. and EU deals, Britain embarks on

high-risk

balancing act

Today's Key Market Moves

* Wall Street's three main indices close lower, falling as

much as

0.4%. The S&P 500's fall is its first in seven sessions.

Curiously, however, the VIX volatility index also falls.

* Japan's 30-year yield leaps 16 bps on the day to a record

high

of 3.14%.

* The Australian dollar falls 0.6%, one of the biggest

decliners

in G10 FX, after the RBA cuts interest rates and leaves the door

open to further easing.

* Mainland Chinese and Hong Kong-listed stocks rise after

China's

central bank cuts rates for the first time since October.

* Safe-haven gold rises nearly 2% on the back of a

weaker

dollar, global trade uncertainty, and Wall Street weakness.

Japan's long bond warning

If Tuesday was a relatively calm day across global equity

markets, the same cannot be said for Japanese Government Bonds,

particularly the long end of the curve after a poor auction of

20-year securities triggered a rush for the exits.

The 30-year JGB yield rose above the previous high from

November 2000 to a fresh record peak of 3.14% and is now up more

than 40 bps this month, putting it on track for its biggest

monthly rise on record.

The spread between Japan's 30-year JGB yield and Bank of

Japan policy rate is now 263 basis points, the widest since 2004

and close to the record high around 290 bps from August that

year.

The severe weakness of longer-dated Japanese sovereign bond

prices is the clearest reflection of a global phenomenon

currently underway - declining demand for 'duration', or

investors' reluctance to hold long-term government debt.

Of course, Japan's fiscal dynamics are particularly fragile.

The country's gross debt-to-GDP ratio of more than 250% is by

far the highest in the developed world. For years it sustained

that huge debt burden while paying the lowest interest rates in

the developed world, but that sweet spot has gone - perhaps for

good - and investors are now demanding a much higher risk

premium.

In many ways, Japan's situation is unique, but where Japan

leads other countries often follow. Public finances and debt

dynamics are deteriorating across the G7 and beyond, and ratings

agency Moody's last week stripped the U.S. of its triple-A

credit rating.

The impact on U.S. assets has been relatively muted so far,

although long-dated yields remain elevated, indicating that the

move was hardly a shock. Wednesday's 20-year Treasury note

auction will be under the spotlight, though, for signs of how

strong or otherwise investor demand is.

There will probably always be demand for the most liquid

asset in the world's deepest market - it's just a question of

price. In that light, interest from foreign buyers at the

20-year auction will be intensely scrutinized, given the growing

worries about 'de-dollarization' and Treasuries' 'safe-haven'

status.

What could move markets tomorrow?

* Japan Tankan non-manufacturing index (May)

* Japan trade (April)

* Indonesia interest rate decision

* UK inflation (April)

* U.S. 20-year Treasury note auction

* ECB publishes Financial Stability Review

* G7 finance ministers, central bank chiefs meeting

in

Canada

Opinions expressed are those of the author. They do not

reflect the views of Reuters News, which, under the Trust

Principles, is committed to integrity, independence, and freedom

from bias.