BOJ's Yield Curve Control Breaks, Allowing Japanese Yields to Finally Rise

The 'widowmaker trade' refers to the repeated bets against Japanese government bonds (JGBs), expecting prices to fall and yields to rise. This strategy seemed persuasive due to Japan's high public debt, ultra-low yields, and expectations for monetary normalization.

However, deflation, persistent demand from domestic institutions, and the Bank of Japan's bond buying repeatedly punished traders who positioned too early. The BOJ's Yield Curve Control policy, introduced in 2016, aimed to keep the 10-year JGB yield around its policy objective, further restraining upward pressure on yields.

Individual JGB shorts did work at times, but the expectation that each sell-off marked the start of a permanent bond-market reckoning repeatedly failed. The market regime finally changed in 2024, when the BOJ ended negative interest rates and Yield Curve Control, allowing JGB yields to rise.