Carry Trade Unwind: High Yield Risks
- Japan's bond market is causing concern about capital flight from the U.S.
- The yield on Japan's 40-year government bonds hit a high of 3.689% last week and recently traded at 3.318%, almost 70 basis points higher this year.
- Macquarie analysts suggest a "trigger point" could occur where Japanese investors move capital from the U.S.
Fears of capital flight from the U.S. are escalating as Japanese government bond yields surge,signaling a potential unwinding of the carry trade. This situation, detailed at News Directory 3, could destabilize global financial markets. The primary_keyword, “carry trade” and the secondary_keyword, “Japanese bond yields” are creating a perfect storm, with analysts warning of a possible market “Armageddon” should yields continue their climb. The escalating yields and the consequent increase in borrowing costs are putting pressure on the global economy. Experts note that with Japan’s net external assets at an all-time high, the shift in capital could be notable, further impacting markets. Discover what’s next.
Rising Japan Bond Yields Fuel Capital Flight Fears, Threatening Global Markets
Updated May 28, 2025
Japan’s bond market is causing concern about capital flight from the U.S. as long-dated yields approach record highs. Demand for 40-year government bonds reportedly dropped to its weakest level since November,according to Reuters calculations.
The yield on Japan’s 40-year government bonds hit a high of 3.689% last week and recently traded at 3.318%, almost 70 basis points higher this year. Yields on 30-year government debt are up more than 60 basis points this year at 2.914%, while 20-year debt is up over 50 basis points.
Macquarie analysts suggest a “trigger point” could occur where Japanese investors move capital from the U.S. back home. Albert Edwards, global strategist at Societe Generale Corporate & Investment Banking, said climbing yields could “trigger a global financial market Armageddon.”
David Roche, strategist at Quantum Strategy, said elevated yields spell trouble for global markets as they translate to increased borrowing costs. He added that Japan’s net external assets hit an all-time high in 2024 at 533.05 trillion yen ($3.7 trillion).
“Tightening global liquidity will reduce world growth to 1% and by raising long term rates it will tighten financial conditions and extend the bear market in most assets,” Roche said.
Japan looks like a ticking time bomb. if confidence in one the financial market’s traditionally safe assets has cratered, confidence in the global market could go with it.
Michael Gayed
author of the Lead-Lag Report
Carry Trade Jitters
The steepening of Japan’s yield curve is due to japanese life insurance companies largely meeting their regulation-driven buying requirements, according to rong Ren Goh, portfolio manager at Eastspring Investments. With the Bank of japan scaling back bond purchases, the demand-supply mismatch is likely to fuel higher yields.
Edwards said that if sharply higher JGB yields entice Japanese investors to return home, the unwinding of the carry trade could cause a ”loud sucking sound” in U.S. financial assets. Higher yields tend to strengthen the currency.
Japan’s 20-year government bond yields in the past five years
Carry trades involve borrowing in a low-interest-rate currency like the yen and using those funds to invest in higher-yielding assets abroad.
Michael Gayed, author of the Lead-Lag Report, said that if the U.S. administration lowers bond yields and weakens the dollar while Japanese bond yields are rising, it damages the cheap yen narrative that fuels the yen carry trade.
Alicia García-Herrero, chief economist for Asia Pacific at natixis, warned that the carry trade unwinding will be worse than that in August. She added that the strengthening yen is unsustainable for Japan’s economy.
Gradual Unwind
Guy Stear, head of developed markets research at Amundi, said big carry positions typically build up when there is a strong FX trend, or very low FX volatility, and when there is a big short term interest rate differential.
Riccardo Rebonato, professor of finance at EDHEC Business School, said that what’s going to happen this time will most likely be a steady decline in the carry trade unwind because of the erosion in confidence on U.S. dollar.
Masahiko Loo, senior fixed income strategist at State Street Global advisors, said foreign holdings of U.S.assets are concentrated in U.S.equities, rather than Treasurys.
According to Apollo’s chief economist Torsten Slok,a larger chunk of foreign U.S.asset holdings is concentrated in equities at close to $18.5 trillion, followed by U.S. Treasurys at $7.2 trillion.
What’s next
Analysts are closely watching the Bank of Japan’s next moves and their potential impact on global markets.The focus remains on whether the rise in Japanese bond yields will continue and how investors will react.