Japan's bonds are falling... why that's a problem

January 20, 2026

We didn’t even have Japan on our risk board.  Late last night, we noticed that Japan’s bond market was selling off (prices fell, rates rose).  To be fair, Japanese rates had been rising for a while.  This was due to increasing concerns around the country’s fiscal situation.  But a govn bond auction yesterday seemed to start a more severe single day rout.  

See the JPN 10yr yield below.

That selloff in Japan bonds is leading to a global bond selloff.  German bonds.  UK bonds.  US bonds. All of them are falling today, and long-term interest rates around the world are moving higher in unison. 

Why is Japan having this cascading effect?  In bond world, everything revolves around “spreads”.  By spreads, I mean the difference between interest rates of various bonds.  Investors look at the spreads between Japan’s bonds, US bonds, UK bonds, etc.  And the spreads between maturities – 2yr vs 10yr, etc.

Now, Japan is a noteworthy corner of the global bond market.  The rates on Japan’s debt historically are the lowest in the world.  (That’s typically because of their deflation problem.)  As a result, many investors will look at the spreads between Japan and other government bonds.  Those investors will sometimes sell Japan bonds and buy other bonds (aka, “carry trade”) and profit from the spread. 

So, since Japan’s bond yields are going up, those investors will demand a corresponding increase in the yields of other countries’ bonds.  And so off we go into a global bond market sell-off.

Now, higher long-term interest rates in the US has obvious consequences for the cost of borrowing (especially related to mortgage costs). But why does this matter for the stock market?  Well, some hedge funds will borrow money in Japan (to take advantage of their lower interest ratest) and then invest that money in things that are not bonds – say US tech stocks, for instance.  This is a higher risk form of the “carry trade”.  But the net impact is the same.  When Japan yields rise, the cost to that investor goes higher, so they might be forced to sell what they bought to cover their loan in Japan.  If “what they bought” is US stocks, then that will create selling pressure on US stocks. 

This “carry trade unwind” happened famously in August 2024, when we got a “flash crash” of sorts.  That was a more extreme version of what’s happening today.  Back then, Japan’s bond yields rose, but also the foreign exchange moved the wrong way.  That compounded the losses, which only accelerated the forced selling. 

So it’s hard to parse out the impact of Japan versus other impacts.  But some of the pullback in the market today is due to this “unwinding carry trade” effect.