Strategy Jan 5, 2026

Bond Yields Are Rising Around the World - Not to Panic

Framework

Bond yields are rising all over the world in countries such as America, Germany, Japan, and India, and many schools of thought are trying to diagnose this issue.

School 1: One school of thought is that government deficits are becoming increasingly concerning, causing investors to demand higher yields to hold government debt. The U.S. budget deficit is currently around 6% of GDP, while U.S. government debt has surpassed $40 trillion. At the same time, the 30-year Treasury yield has reached around 5.35%. The basic argument is that larger government deficits require governments to issue more debt. If the supply of bonds increases faster than the demand for those bonds, investors may require higher yields to absorb the additional supply. Higher yields mean lower bond prices, all else equal. However, there are important nuances to be drawn.

India, for example, has a much greater emphasis on its domestic bond market, meaning it is less reliant on outside funding than the United States. Domestic banks, insurers, pension funds and other Indian institutions play an important role in the government bond market, while foreign investors remain a relatively small portion of the overall market. This can make India's bond market less sensitive to foreign capital outflows. Japan provides another interesting example. The Bank of Japan has been reducing its purchases of Japanese government bonds as part of its monetary-policy normalization. When a major buyer reduces its purchases, the market has to absorb more of the government's bond issuance without that same level of central-bank demand. This can put upward pressure on yields. Japan is also facing increased fiscal pressure. The government's budget requests for the next fiscal year have reached ¥143.1 trillion, while debt-servicing costs are projected at ¥36.64 trillion. At the same time, Japan's 10-year government bond yield recently reached 3%, its highest level since 1996. However, there are multiple variables at play here. Japan's rising yields are not simply the result of government deficits. The Bank of Japan is also moving away from its previous ultra-loose monetary policy, with markets expecting additional rate increases as inflation and yen weakness remain concerns.

School 2: The U.S. has been the cornerstone of the global financial system, especially since World War II, and has been a de facto leader in the global monetary and financial system. The U.S. dollar has served as the world's dominant reserve currency, supported by the size of the U.S. economy and the depth and liquidity of U.S. financial markets. One argument is that foreign demand for U.S. government debt may be changing. The Financial Times recently argued that price-insensitive investors such as central banks have become a smaller share of Treasury ownership, while more price-sensitive investors such as households and investment funds have become increasingly important. The FT linked this shift partly to declining foreign official demand, de-dollarization and slower growth in global reserve accumulation. This matters because foreign governments and central banks have historically been important buyers of U.S. government debt. According to U.S. Treasury data, Japan remained the largest foreign holder of U.S. Treasury securities, with approximately $1.19 trillion in Treasury holdings in March 2026, while China held approximately $652 billion at the same time. There has been evidence of foreign selling. Treasury data showed that foreign holdings of U.S. Treasuries declined in March 2026, with Japan and China among the countries contributing to the decline. Foreign holdings fell from approximately $9.49 trillion in February to $9.35 trillion in March. However, it is important not to automatically assume that selling U.S. Treasuries means foreign governments have lost confidence in the United States. Countries can sell Treasury securities for many reasons, including currency intervention, portfolio reallocation, changing domestic interest rates, liquidity requirements, or simply because they need to convert dollars into their domestic currency.

Japan is a particularly interesting example. Japanese yields have risen sharply, with the 10-year JGB yield moving above 3%. As Japanese domestic yields become more attractive, Japanese investors may have less incentive to invest abroad. This could potentially reduce Japanese demand for foreign bonds, including U.S. Treasuries. Reuters has highlighted the possibility of Japanese capital being repatriated as domestic yields rise. Japan's recent currency intervention also demonstrates why Treasury selling should not automatically be interpreted as a loss of confidence in the United States. When Japan intervenes to support the yen, it can sell dollar-denominated reserve assets and convert the proceeds into yen. That is fundamentally different from selling Treasuries because the Japanese government believes U.S. assets are becoming unattractive. Therefore, while reduced foreign demand for U.S. Treasuries could contribute to higher yields, it is difficult to say that de-dollarization or Trump's policies are directly responsible for the entire increase.

Sources:

Bank of Japan. “Statement on Monetary Policy.” Bank of Japan. Bank of Japan — Monetary Policy U.S. Department of the Treasury. “Treasury International Capital (TIC) System.” U.S. Department of the Treasury. U.S. Treasury — TIC System U.S. Department of the Treasury. “Major Foreign Holders of Treasury Securities.” U.S. Department of the Treasury. Major Foreign Holders of Treasury Securities Financial Times. “America is losing its captive creditors.” September 10, 2026. Financial Times — America is losing its captive creditors Reuters. “Good evening, Mr Bond.” September 4, 2026. Reuters — Good evening, Mr Bond Reuters. “Why the BOJ will bet small on rate hikes now to avoid a bigger shock later.” September 8, 2026. Reuters — Why the BOJ will bet small on rate hikes Reuters. “Japan’s bond rout sends yields to three-decade highs.” September 2026. Reuters reporting on Japanese government-bond yields, BOJ policy, inflation and capital repatriation. Reuters. “Plunging private foreign demand could fan U.S. bond rout flames.” August 18, 2026. Reuters — Plunging private foreign demand Reuters. “Unloved, but unbroken: the U.S. bond market is working as it should.” September 8, 2026. Reporting on U.S. deficits, inflation, nominal growth and Treasury yields. Reuters. “AI-driven surge in bond yields could be next risk for markets and growth.” August 14, 2026. Reporting on AI investment, corporate borrowing and global bond yields. Reuters. “Bond market may be pricing AI productivity gains as yields rise — JPMorgan.” August 28, 2026. Reporting on AI-driven productivity expectations and long-term bond yields. Bloomberg. “Six Charts That Explain Why Japan’s Bond Yields Are Surging.” September 2026.

Bottom line

Not investment advice. This is a research memo and a public portfolio of thinking.