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6/13/2025
We believe that fears of JGB weakness spreading to other government bonds appear to be exaggerated.
Yields on Japanese government bonds (JGBs) have risen sharply since the beginning of the year. The upward trend in ultra-long maturities in particular has fueled concerns among investors that this could be the first sign of wider turmoil in the global government bond market. At the end of May, 30-year maturities peaked at just under 3.20 percent, 90 basis points above their year-end level, before recovering. The shift down in JGBs – and consequent sharp rise in their yields – has shocked markets because Japanese bonds have long been among the most stable segments of this asset class.[1]
One reason for this is that the Bank of Japan (BoJ) has long been the largest holder of JGBs. Since the 1990s Japan experienced a deflationary cycle, known as the “lost decades.” Bond purchases by the BoJ reduced the yield on JGBs and enabled the government to take on more debt and consequently invest more and were part of the BoJ's strategy to stimulate the domestic economy. Now that Japan appears to have left deflation behind, however, the BoJ is focusing on gradually reducing its holdings.
Japanese government bonds have reacted to this development across the entire maturity spectrum. As can be seen in the Chart of the Week, yields on all maturities are well above those seen a year ago, with the rise in yields most pronounced in ultra-long bonds. While 30-year JGBs are yielding almost 73 basis points more, the increase in yield for ten-year maturities is only around 43 basis points. Securities at the ultra-long end of the curve are usually the most sensitive to changes in the fundamental (or structural) economic environment.
Investor concerns have risen in recent weeks. Japanese insurers and other institutional investors are typically keen to invest in ultra-long bonds, but the latest auctions have fallen well short of expectations. Concerns about increased volatility due to the trade war triggered by the Trump administration, coupled with uncertainty surrounding the BoJ's future monetary policy stance, have impacted investor sentiment.
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 6/10/25
We expect Japanese monetary policy, in particular, to continue to influence JGB yields in the coming months. “In our view, more interest rate hikes than currently priced in by the market are likely to lead to continued yield increases for JGBs,” said Stephan Matthaei, the DWS portfolio manager responsible for JGBs.
However, even though JGB yields have already risen significantly across the curve and are likely to continue doing so, we believe that this should not be overinterpreted. Many of the reasons for the rise are domestic, and as long as the movement remains orderly — particularly in the view of the BoJ — it could be seen as a convergence towards fundamental reality rather than as a warning signal for the global government bond segment.
All data and news items – unless otherwise stated - from Bloomberg Finance L.P. as of 6/10/25
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