For the first time in decades, Japan’s core inflation (ex-energy/fresh food) is running hotter than the U.S..

That quietly rewrites the Bank of Japan’s reaction function: holding the long end down is no longer “stability,” it’s policy mismatch.

Markets know it — hence the JGB 30Y ripping to record highs.

credit to @_Investinq (X) for the above image

Why Japan’s Shift Matters for Global Bonds

The “deflation anchor” is gone.

For decades, Japanese pensions, insurers, and banks were the world’s most reliable buyers of U.S. Treasuries and other long-term bonds.

They did this because yields at home were stuck near zero, so it made sense to look abroad.

But with the Japanese 30-year bond now yielding around 3.2%, and with the costs of hedging dollars still high, Japanese investors no longer need to look overseas.

Their own bonds finally compete with U.S. Treasuries.

That means money is likely to repatriate back to Japan → fewer buyers for U.S. debt, and higher long-term borrowing costs in the U.S.

The carry trade is breaking down.

For years, global investors borrowed cheap yen and used it to buy higher-yielding assets around the world.

This “yen carry trade” was only possible because Japanese interest rates were stuck near zero and the yen was stable.

Now, with inflation heating up in Japan and bond yields rising, that math has flipped.

Funding costs are higher, the yen is more volatile, and the carry trade is fragile.

When these positions unwind, it doesn’t just hit Japan — it spills over into emerging-market currencies, credit markets, and riskier equities worldwide.

How It Spills Into the U.S. (and Your Portfolio)

If Japanese investors pull back from Treasuries, it means fewer natural buyers for U.S. government debt.

Less demand → higher yields on long-term bonds, no matter what the Fed does with short-term rates.

We’ve already seen this “misfire” in action:

The Fed cut rates by a full percentage point, and instead of falling, mortgage rates rose.

That’s a signal that long-term yields aren’t taking orders from the Fed anymore—they’re responding to global supply and demand, with Japan’s shift front and center.

And here’s why it matters beyond bonds:

• Higher long-term yields = higher costs of borrowing for households and businesses.

• Stock valuations feel the pull. When interest rates stay stubbornly high, investors discount future earnings more heavily, which drags down equity multiples.

• It doesn’t take a recession for this to bite. Just persistently high long-term yields are enough to reset the price of everything built on top of the bond market: housing, credit, equities, even currencies.

When Anchors Break: Japan, the U.K., and the Rising Tide of Sovereign Stress

Look around: Japan’s 30-year bond is at record highs. The U.K.’s 30-year just ripped past 5.6% — the highest since 1998.

These aren’t random moves. They’re the same storm, hitting from two shores.

The End of the Deflation Anchor

For decades, Japan was the ballast of the global bond market. Its near-zero yields exported cheap, stable money that kept global rates pinned.

Now, for the first time in nearly 50 years, Japanese inflation is running hotter than U.S. inflation. The anchor lifted — and suddenly, every long-term bond market in the world is being repriced higher.

Money Comes Home

With 30-year JGBs yielding ~3.2%, Japanese insurers and megabanks don’t need Treasuries or gilts anymore.

They can finally earn yield safely at home.

That means a giant, price-insensitive buyer is stepping back from London and Washington.

Less demand for USTs and gilts → higher yields are the only option.

The Global Carry Trade Cracks

For years, investors borrowed cheap yen and used it to fuel global risk-taking — from EM currencies to high-flying tech.

But with JGB yields rising and the yen more volatile, that math no longer works.

When the carry trade unwinds, it doesn’t stay in Japan — it spills into credit, currencies, and equities everywhere.

Too Much Supply, Too Little Balance Sheet

The U.K. is issuing record debt while the Bank of England is dumping gilts back into the market.

Dealers are already stretched thin.

Higher yields aren’t a choice — they’re the only clearing price left.

Collateral Under Stress

Every tick higher in yields marks down dealer bond inventories, raises risk limits (VaR), and forces tighter repo haircuts.

Normally the Fed’s reverse repo facility would buffer that stress, but with RRP balances near empty, shocks spill straight into the private market.

The Big Picture

Japan’s shift isn’t local — it’s global.

The U.K. gilt surge is just another reflection of the same thing:

• The deflation anchor is gone.

• Natural buyers are gone.

• Balance sheet slack is gone.

And when sovereign debt — the foundation of the financial system — reprices everywhere at once, every layer above it (credit, equities, FX, collateral) has no choice but to follow.

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Luke Lovett
Cell: 704.497.7324
Undervalued Assets | Sovereign Signal
Email: [email protected]

Disclaimer:
This content is for educational purposes only—not financial, legal, tax, or investment advice. I’m not a licensed advisor, and nothing herein should be relied upon to make investment decisions. Markets change fast. While accuracy is the goal, no guarantees are made. Past performance ≠ future results. Some insights paraphrase third-party experts for commentary—without endorsement or affiliation. Always do your own research and consult a licensed professional before investing. I do not sell metals, process transactions, or hold funds. All orders go directly through licensed dealers.