Bond yields: Japan’s government bonds are sending a very specific message. That’s the case made by BlackRock Investment Institute, in a broader commentary on the trend in yields across the world’s bond markets — a trend that is, naturally, shaped by expectations over future central bank interest-rate decisions, in a macro environment marked by inflation anxiety reignited by the fallout from the US-Iran war.
BlackRock notes that it’s been happening for a while now, with the Covid-19 pandemic apparently marking the turning point: sovereign bond yields worldwide have been pointing upward since 2020-2021. «Since 2020-2021, government bond yields have risen broadly across the United States, Europe and Japan,» reads the analysis from the American asset-management giant, which goes on to note that, more recently, it has been «the recent repricing of expectations around US monetary policy» — with the changing of the guard at the Fed, now led by Kevin Warsh — that has «represented a further catalyst».
The case of Japan’s government bonds: shaped by Fed rate repricing, but not only that
The consequences haven’t taken long to show up: «Higher Treasury yields and a stronger dollar have put renewed (downward) pressure on the yen, making the Bank of Japan’s gradual rate-normalization process more challenging and pushing Japanese government bond (JGB) yields even higher».
The move, BlackRock notes, has been amplified by Japan’s own macro backdrop — namely, expectations of higher inflation and concerns over the expansionary fiscal policy launched by the government of Sanae Takaichi.
It’s precisely from Japanese bonds, BlackRock stresses, that a signal has emerged which investors positioned in sovereign bond markets need to take into account. Which one? For a start, the presence of what could be called a New Normal.
BlackRock on sovereign bonds: a new higher-rate regime, confirmed by Japan
Here’s how BlackRock Investment Institute puts it in its Weekly Market Commentary:
«The significant repricing of Federal Reserve rate expectations over the past six months has had effects that have gone well beyond US markets. Japan is a striking example: 10-year government bond yields have tested their highest levels in thirty years, while the yen has depreciated to its weakest since 1986. The new regime of higher interest rates, outlined in our Midyear Outlook, is creating more favorable conditions for generating stable, durable income. That said, selectivity remains essential».
The alignment of Japanese bond yields with those of Europe and the United States is now a matter of fact.
BlackRock points to the movement in long-term forward rates implied by the JGB curve — that is, market expectations for future Japanese interest rates, calculated from current Japanese government bond yields — which today hover around 5%, compared with roughly 6% in the United States, 5.3% in France, 5.5% in Australia and 6.5% in the United Kingdom.
Even Japan, in other words — or rather its government bonds, which have often stood out as a sort of outlier, owing to decades of deflation and ultra-accommodative monetary policy — is now trading broadly in line with its counterparts in advanced markets.
And it’s precisely this case that leads BlackRock Investment Institute to write that JGBs «reinforce our view that the global reset in yields is real and significant».
What should fixed-income investors be watching
So what does this mean for investors weighing whether to hold government bonds?
BlackRock’s answer:
«Higher yields have put bond income back at the center of investment opportunities. Investors are no longer forced to replicate broad bond indices, or to significantly extend duration, to capture attractive returns».
That said, caution is always warranted in investment decisions. Above all, it’s worth remembering that «not all sources of income carry the same value».
As a result, the «key question is whether investors are being adequately compensated for the risks they are taking on».
On this point, BlackRock Investment Institute again turns to the case of Japan: «Japan represents a particularly significant case», given that, while «the Bank of Japan’s gradual approach to monetary normalization has helped keep the global repricing of rates relatively orderly, the continued build-up of short positions against the yen deserves close monitoring».
Japan’s government bonds: watch the yen, its role in carry trades and Bank of Japan rate decisions
Analysts also flagged the crucial role of Japan’s currency: «The yen remains one of the primary funding currencies for carry trades globally». A fact that nonetheless invites more than one consideration.
«While the rise in JGB yields has reduced the yen’s appeal as a funding currency compared with the past — easing the risk of a new carry-squeeze episode similar to the one seen in 2024 (since fewer carry trades are being opened, the lower the risk that they all have to be unwound at once) — an unexpected acceleration in the Bank of Japan’s monetary-policy normalization could trigger a rapid unwind of these positions, with spillover effects across the entire global financial system».
That risk leads BlackRock to prefer equities over government bonds when it comes to Japan — that is, the Tokyo Stock Exchange — as the commentary notes: «We continue to see a more constructive scenario for Japanese equities, as the economy emerges from decades of deflation and against the backdrop of a Bank of Japan that is normalizing monetary policy (raising rates) gradually».
The global bond market: “greater opportunities today to generate income”
Turning back to the global bond market, BlackRock Investment Institute notes that «higher yields have also changed the role of government bonds in investment portfolios». Namely, «higher uncertainty around inflation, higher government financing costs and rising term premiums mean that (sovereign bonds) no longer provide the same protective capacity during risk-off phases».
At the same time, «investors today have access to a much wider range of opportunities to generate income. Our analysis shows that more than 80% of the global fixed-income universe now offers yields above 4%, compared with just 6% five years ago».
BlackRock concludes by stressing that it’s important to always apply the principle of selectivity:
«The Bloomberg Global Aggregate Bond Index offers a yield of 3.8% with volatility of 5.1%, while an equally weighted portfolio of income strategies offers a yield of 5.5% with lower volatility, at 4.3%. A figure that reinforces the case for a more selective approach».
Beyond bonds: what BlackRock Investment Institute prefers right now among the various asset classes
So what are BlackRock’s preferences among sovereign bonds, in both advanced and emerging markets? «Among government bonds, we prefer the short and intermediate segments of the US and European yield curves, along with select emerging-market government bonds in local currency, where rate repricing has been significant and fundamentals are improving».
Beyond sovereign bonds, the asset-management giant’s analysts are looking at «selected investment-grade credit, higher-quality high yield, and direct lending».
BlackRock’s conclusion is as follows:
«The rise in yields has put bond income back among the leading investment opportunities. However, in a context of structurally higher rates, the search for yield must be paired with careful security selection, favoring the segments of the market where the premium on offer adequately compensates investors for the risks they are taking on».
Editor’s note
This article was originally published in Italian on money.it by Laura Naka Antonelli on July 14, 2026 as «Bond e rendimenti, BlackRock spiega il messaggio che arriva dai Titoli di Stato del Giappone». It has been translated and adapted for an international audience by the Money.it International desk.
