Japanese government bond (JGB) yields have surged to multi-decade highs, with the benchmark 10-year yield reaching 2.901% last Thursday, a level not seen since 1996, before settling at 2.781%. This marks an increase of over 70 basis points since the start of the year. The yield on 20-year JGBs also peaked at 3.901% last Thursday. The sell-off in Japanese bonds has been attributed to the Bank of Japan's policy normalization and concerns over Prime Minister Sanae Takaichi's spending plans [1].
Experts are divided on the attractiveness of JGBs. Masahiko Loo, senior fixed income strategist at State Street Investment Management, stated that JGBs are transitioning from 'uninvestable' to 'investable,' as the higher yields mean investors are 'finally' being compensated for holding Japanese bonds. Charles Gave, co-founder of Gavekal, argued that Japanese bonds, especially long-dated ones, are currently the most attractive in the world and recommended that investors shift towards a balanced Japan portfolio, replacing euro, U.S. bonds, and gold with Japanese long bonds. Gave also predicted that Japanese yields will soon fall and the yen will appreciate, particularly if oil prices remain stable, leading to significant outperformance of long-duration Japanese bonds over gold in yen terms [1].
However, not all analysts share this optimism. Henning Potstada, global head of multi-asset at DWS, contended that European bonds remain more attractive due to the European Central Bank's higher policy rate of 2.25% compared to the Bank of Japan's 1%. Potstada also highlighted concerns about Japan's debt sustainability, noting Tokyo's debt-to-GDP ratio exceeds 200%, far higher than the EU's 81.7%. He suggested that investors should maintain or increase their European positions due to the relative stability offered by Europe [1].
Lauren Hyslop, investment manager at Mattioli Woods, observed that as JGB yields rise, investors are 'selectively' returning to the Japanese bond market [1].
CONCLUSION
Japanese government bond yields have reached levels not seen in decades, prompting renewed interest from some global investors, though opinions on their attractiveness remain divided. While some experts see JGBs as increasingly investable and poised for outperformance, others cite higher yields and greater stability in European bonds, as well as concerns over Japan's debt sustainability. The market impact is high, with JGBs now firmly back in focus for international investors.