Japan’s longstanding role as the global bond market’s “quiet stabilizer” may be about to shift — and U.S. Treasurys could be first to get caught up in the fallout. Japanese investors and institutions are among the biggest foreign holders of sovereign debt. At the end of 2024, they were the top overseas holder of U.S. Treasurys, owning 12.4% of foreign-held federal debt — securities worth more than $1 trillion. Japan is also a major holder of sovereign debt issued by governments across Europe and Asia. Much of the appeal for Japanese investors has been the relatively higher yields offered by countries like the U.S., Germany and the U.K., which also offer relative political and economic stability. Bond yields and prices move in opposite directions. When investors are spooked by a government’s fiscal policies, it can cause widespread selling of that country’s bonds and push yields higher. Japan’s bond yields were historically low, but after Sanae Takaichi became prime minister in October, her tax-cutting and spending plans triggered a sell-off. The yield on the benchmark 10-year Japanese government bond was last seen trading at around 2.12%, having cooled in recent weeks after yields hit three-decade highs. JP10Y YTD line Japan 10-year government bond Over the past year, the spread between the 10-year Japanese bond and the U.S. 10-year Treasury has narrowed by about 115 basis points. Between Japan and the U.K. , the spread has narrowed by around 92 basis points, and, between Japan and Germany , by about 45 basis points. Nigel Green, CEO of wealth advisory deVere Group, warned that investors did not seem to be fully pricing in rising Japanese yields’ potential knock-on effect for the global bond market. For years, Japanese institutions have “been forced overseas because yields at home were negligible,” he said. Green added that “sustainably higher domestic bond yields” change that. “A steady reweighting back into JGBs is likely to be enough to shift global pricing,” Green told CNBC. “Japan has been a structural buyer of U.S. Treasurys and major developed-market bonds. If you remove part of that bid, yields would adjust upward.” DeVere said he expected such a shift to cause a sustained rise in long-term bond risk premiums, a steeper yield curve across major markets, and meaningfully tighter financial conditions worldwide. “Japan has exported savings for a generation. If more of those savings stay at home, global bond markets would lose one of their quiet stabilizers,” Green added in an email. “Markets still appear to be behaving as if Japanese volatility is a temporary disturbance rather than a regime shift, which, we believe, is a mistake.” He warned that U.S. Treasurys are the most exposed bonds due to the scale of Japanese ownership, with European sovereign bonds with stretched fiscal positions next. “Any market that has relied on steady Japanese demand for duration can expected to be vulnerable,” Green said. Derek Halpenny, head of research in the global markets EMEA and international securities division of Japanese bank MUFG, told CNBC it makes “complete sense” for Japanese investors to consider keeping more capital in their domestic bond market. “We do not think a necessary specific level of yield will be the catalyst,” he said, arguing that other factors – such as greater investor confidence in Japan’s economic management – will be more important. Since becoming prime minister, Takaichi, Halpenny said, has been making the case for prudent fiscal policy management ahead, which had helped to bring yields down. But Halpenny added that the Bank of Japan’s monetary policy was widely considered too loose, and that two or three rate hikes were needed to restore bond investors’ confidence in the central bank. In 2024, the Bank of Japan ended a decade-long stimulus program and went on to raise interest rates several times. In January, the central bank held its key rate steady at 0.75% after hiking it to its highest level since the 1990s a month earlier. With rates increasing and inflation subsiding , “the conditions for better JGB investor sentiment are approaching,” Halpenny said. “However, greater investment at home is unlikely to unfold abruptly (unless due to some shock) and hence we see this unfolding more gradually with new investments being kept at home and investors gradually diversifying more into JGBs.” Halpenny added that his team was watching flows from pension funds like the Government Pension Investment Fund (GPIF), and said there was nothing yet in the data to indicate a shift was underway. At the end of its fiscal third quarter, 50% of GPIF’s investments were in the bond market. Of those holdings, close to half were foreign bonds – investments that totaled 72.8 trillion Japanese yen ($470.6 billion). ‘A risk that needs constant monitoring’ James Ringer, global unconstrained fixed income fund manager at Schroders, told CNBC that Japanese capital returning home is “a risk that needs constant monitoring” given where the country’s government bond yields are trading. “However, there is more to the story than just looking at yields,” he said. “JGB volatility remains relatively high and liquidity relatively low. We would need to see both improve before any large repatriation flows — especially for certain types of Japanese investors.” He added that, the post-Covid world continues to highlight the benefits of diversification. “By investing overseas, Japanese investors are able to achieve that diversification and access a wide range of highly rated, liquid fixed income markets,” Ringer said. DeVere’s Green noted that the change in Japanese bond yields could have an impact even if investors in Japan maintain their holdings overseas. “Japan was the developed world’s proof that ultra-low rates could persist indefinitely. It anchored the lower bound of expectations, but this scenario, it seems, is shifting,” he said. “Once the final holdout normalizes, the case for permanently suppressed yields weakens everywhere. Investors should, therefore, consider pricing the possibility that developed market rates have structurally moved higher.” Green added that Japan has historically provided stability through predictability, as domestic investors owned most government debt, “creating a reliable, price-insensitive base.” “If that system becomes more yield-sensitive and more volatile, it would change the tone of global fixed income,” he said.
The global bond market could be about to lose its ‘quiet stabilizer’ — and U.S. Treasurys are at the top of the exposure list