Key Takeaways:
A surge in Japanese government bond yields to levels unseen in decades is forcing a strategic rethink across global markets, with money managers bracing for the risk that Japan’s institutional investors may start selling their nearly $1 trillion pile of US Treasuries.
"New money is not going to be allocated overseas," Mark Dowding, chief investment officer at BlueBay Asset Management, said, capturing the shift in market logic. "It's not going to US corporate credit, it's not going to US Treasuries, it's going to be allocated back into the domestic market in Japan." BlueBay launched its first-ever Japanese bond fund in March to capitalize on the move.
The rout in bonds has been global, with the US 10-year Treasury yield climbing 12 basis points to 4.6% in its biggest weekly jump since 2025, while the UK's 10-year gilt yield touched 5.17%. But the moves in Tokyo have been historic, with Japan's 30-year yield crossing 4% for the first time since its 1999 issuance. The repricing comes as the Bank of Japan, which raised its policy rate to 0.75% in December, is widely expected to hike again in June.
The core fear for US markets is the potential unwinding of a multi-decade trade. If Japanese investors, the largest foreign holders of US debt, begin repatriating capital to capture newly attractive domestic yields, it could substantially increase borrowing costs for the US government and ripple through the global economy.
The velocity of the move in Japanese government bonds (JGBs) has put global investors on notice. The benchmark 10-year JGB yield climbed to 2.73%, the highest since 1997. The 20-year rate hit its highest since 1996, and the 40-year yield reached its highest since debuting in 2007. "In Japan, where interest rates have been near zero for a long time, the fact that the yield on the 30-year JGB has risen to 4% is historic," said Rinto Maruyama, a senior strategist at SMBC Nikko Securities Inc.
This follows the Bank of Japan's gradual exit from its massive quantitative easing and yield curve control policies, which had long suppressed domestic rates. With the central bank no longer the dominant buyer, traditional supply and demand dynamics are returning, bringing volatility with them. The market now anticipates another 25-basis-point hike from the BoJ as soon as June, which would take the policy rate to 1%.
For decades, Japan's near-zero interest rates pushed its pension funds, insurers, and banks to invest trillions of dollars overseas in search of returns. This made them the bedrock of demand for assets like US Treasuries. That logic is now reversing. While the flow is not yet a torrent, the early signs are there. According to data from EPFR, funds dedicated to Japanese sovereign bonds saw a record net inflow of about $700 million in March.
Still, analysts note that a large-scale repatriation has not yet begun. In fact, Japanese investors were still net buyers of about $50 billion in foreign bonds over the past 12 months, according to RBC Capital Markets. Some investors may be hesitant to buy JGBs aggressively, knowing that potential further government spending could push prices lower and yields even higher. "The supply and demand dynamics both point to yields continuing to rise," said Abbas Keshvani, a macro strategist at RBC.
The moves in Japan are happening alongside a synchronized global bond selloff. Persistent inflation data, rising oil prices above $100 a barrel, and geopolitical tensions have fueled speculation that central banks like the Federal Reserve will have to keep policy tighter for longer. Traders are now pricing in an almost two-thirds chance the Fed will hike interest rates in December.
"Bond yields definitely feel like they are getting unhinged,” Subadra Rajappa, head of research at Societe Generale Americas, told Bloomberg Television. The risk is that a sustained selloff in Treasuries, exacerbated by a reduction in Japanese demand, could unsettle the rally in US equities by making government bonds a more attractive alternative and increasing the cost of capital for corporations.
This article is for informational purposes only and does not constitute investment advice.
