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Investing.com -- Japanese institutions and investors have long been a reliable source of demand for U.S. Treasuries, but a relentless surge in Japanese government bond yields is flashing a warning for U.S. bondholders—raising the risk that Japanese money could start flowing home just as global appetite for U.S. debt wobbles.
“There could be a trigger point where Japan’s investors suddenly repatriate their capital from the US and into Japan. Some traders sense that this point is coming, which is why USD/JPY is being offered as JGB yields rise,” Macquarie analysts said in a recent note.
Japanese entities, including official reserves, are the largest foreign holders of U.S. Treasury securities, with roughly $1.13 trillion as of Q1 2025, the analysts said. After years of ultra-low yields, however, Japan’s bond market is on the up and up, narrowing the gap with U.S. bonds, reducing the incentive to keep capital in the U.S. is fading.
The 30-year JGB yield jumped to record high of 3.185% recently, while the 40-year yield touched an all-time peal of 3.635%. this awakening from hibernation in JGBs has the Bank of Japan’s fingerprints all over it. The BoJ has shown more flexibility in its yield curve control as inflation in Japan ticks higher, rising JGB yields are making domestic bonds more attractive.
The risk, Macquarie warns, is that if JGB yields are allowed to rise far enough, “the incentive to export capital to the US becomes an incentive to import capital back from the US.” This could trigger a sudden rebalancing of Japanese institutional portfolios out of Treasuries and into JGBs, putting the dollar and U.S. rates at risk.
The pressure is already showing up in markets: the U.S. 20-year bond auction recently saw weak demand from foreign buyers, sending yields to a two-year high and weighing on the dollar. While the U.S. is not alone in facing higher yields—Bunds and Gilts have also sold off—Macquarie argues the dollar is being singled out because foreign investors are “overweight with US exposure” after years of outperformance
The Bank of Japan is unlikely to intervene with rate cuts or a return to strict yield curve control, preferring instead to signal financial stability and step up JGB purchases only if yields spike too quickly.
The Bank of Japan, however, is unlikely to intervene directly with rate cuts or resumption of strict yield curve control, it will likely signal a commitment to financial stability and step up JGB purchases if yields rise too quickly. But with Japanese investors facing a more attractive domestic bond market and global risks rising, the risk of capital flight from U.S. Treasuries—and fresh volatility for the dollar and U.S. rates—remains front and center.