In mid-August 2026, long-term U.S. Treasury bonds experienced heavy selling pressure, pushing the 30-year bond yield above 5.3%, the highest since 2007, while the 10-year bond yield rose close to 4.7–4.8%.
This pressure was driven by multiple factors occurring simultaneously, especially escalating conflicts between the U.S. and Iran after stalled negotiations, which raised oil prices and concerns that inflationary pressures might persist.
Meanwhile, the market faced increased uncertainty over monetary policy direction under new Federal Reserve Chair Kevin Warsh, particularly regarding inflation control and reduced forward guidance, all amid existing U.S. fiscal stability worries as government debt surpassed $40 trillion, over 120% of GDP.
With the budget deficit still high at about 6% of GDP, investors demand higher bond yields to compensate for the increased long-term risks.
However, domestic U.S. factors may not fully explain the upcoming pressures on the U.S. Treasury bond market. The U.S. government and investors may need to pay closer attention to economic and financial developments in other countries, especially Japan—both a key ally and a major funding source amid a severely weakened yen and rising Japanese Government Bond yields, which could increase pressure on U.S. Treasury yields through currency intervention risks and potential repatriation of Japanese capital.
After Japan’s economic bubble burst in the early 1990s, the country faced the 'Lost Decades' marked by sluggish growth, deflation, and near-zero interest rates for an extended period. This led Japanese investors—including banks, insurance companies, pension funds, and individual investors—to seek higher returns overseas, making Japan one of the world's largest capital exporters.
As of the end of June 2026, Japan remained the world's largest holder of U.S. government bonds, with holdings around $1.1 trillion, underscoring that Japan plays not only a vital allied role but also a significant demand source in the U.S. Treasury bond market.
Currently, Japan’s financial market is undergoing major changes, with the yen weakening to 164 yen per U.S. dollar in July—the weakest in nearly 40 years. Simultaneously, Japanese Government Bond yields have risen sharply: the 10-year JGB yield reached 2.95%, the highest since 1996, and the 30-year yield surpassed 4%. These factors indicate Japan is facing simultaneous pressures on its currency and fiscal position.
These three factors are likely to continue pressuring Japan’s financial market, causing the yen to remain weak and JGB yields to stay elevated, as Prime Minister Takaichi shows no signs of changing fiscal policy direction and the BOJ is expected to continue gradual rate hikes. The ongoing Middle East situation also remains prolonged. This scenario poses challenges for Japan and may alter investment behavior of both Japanese investors and authorities in the U.S. Treasury market.
The impact of changes in Japan’s financial market on U.S. government bonds can be viewed in both short-term and long-term contexts as follows.
Short-term: Yen interventions may trigger additional selling of U.S. Treasuries. Japanese authorities need U.S. dollars to buy yen to support the currency, potentially raising dollars through the use of foreign reserves, which include selling U.S. Treasuries. Therefore, significant yen interventions could increase selling pressure on the already pressured U.S. Treasury market.
For this reason, the U.S. government supported Japan’s yen stabilization efforts in late July—a cooperation first seen in 28 years since 1998—with the U.S. selling euros and buying yen instead of actions that might have increased selling pressure on U.S. Treasuries.
Additionally, the U.S. government has encouraged Japan to use the Fed’s FIMA Repo Facility, and Japan has indicated it will use this mechanism if needed, allowing Japan to raise dollar liquidity using U.S. Treasuries as collateral rather than selling them directly in the market. This helps reduce the risk that yen interventions will lead to large short-term sales of U.S. Treasuries.
However, raising dollar liquidity through FIMA carries costs tied to relatively high U.S. interest rates, limiting reliance on this mechanism if Japan needs to intervene heavily or for prolonged periods. Under such circumstances, the likelihood of Japan selling U.S. Treasuries to raise additional dollar liquidity may increase.
Long-term: The key risk may not be selling U.S. Treasuries outright. Rather, it is Japanese investors reducing new investments in U.S. assets and returning to invest more in JGBs, as 10-year JGB yields approach 3% and 30-year yields exceed 4%, significantly above multi-decade averages. JGBs become more attractive for Japanese investors, especially since they avoid exchange rate risk.
The Japanese government has begun signaling support for its Government Pension Investment Fund (GPIF) to increase domestic investments. GPIF holds about $930 billion in foreign assets, including approximately $232 billion in U.S. Treasuries. Even partial portfolio shifts could meaningfully affect demand in the U.S. bond market.
The key issue may not be immediate large-scale selling of U.S. Treasuries by Japanese investors, but rather Japan’s reduced role as a major global funding source in absorbing U.S. Treasury supply if investors shift toward domestic assets while the U.S. still needs to borrow heavily to cover ongoing fiscal deficits. Under such a scenario, the U.S. may have to offer higher bond yields to attract other investors.
Although Japan may not be the main driver pushing U.S. Treasury yields higher now—since major pressures still stem from U.S. issues like high public debt, budget deficits, inflation, monetary policy uncertainty, and geopolitical risks—
Japan could become an amplifier for the U.S. bond market in the future due to shifts in its financial market, potentially leading one of the world's largest capital exporters to repatriate some funds as yen-denominated asset yields become attractive again.
This explains why, in a world where the U.S. must compete to attract capital to finance massive borrowing, Japan may no longer be just a major investor in U.S. Treasuries but is becoming a key variable shaping the future direction of the U.S. Treasury bond market.
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