Japan's Bond Yields Surge Above 3%, Weighing on US Treasury Demand

Japan's 10-year government bond yield has risen above 3% for the first time since 1996, making its domestic bonds more attractive to investors. According to BlackRock, a Japanese investor can earn around 3% from a 10-year JGB, compared to about 2% from a comparable U.S. Treasury after hedging costs are factored in.

This shift could lead to a decline in demand for U.S. Treasuries as Japanese investors opt for higher-yielding domestic assets. BlackRock estimates that a hypothetical 5% portfolio shift would redirect around $55 billion towards Japanese assets, equivalent to roughly 7% of the expected net borrowing by the U.S. Treasury during the quarter.

The Bank of Japan's decision to raise its policy rate and potential further tightening could continue to drive up JGB yields, making them more competitive with U.S. debt. BlackRock warns that rising global yields are adding pressure to Bitcoin and other non-yielding assets by increasing returns available from lower-risk securities.