A view of the Tokyo skyline. Yields on Japan's government bonds are increasingly attractive for the country's long-term investors.ANDREW CABALLERO-REYNOLDS/AFP/Getty Images
A rise in Japanese government bond yields and the related shifting makeup of foreign holders of U.S. government debt could have a far-reaching impact with implications for Canadian investors, analysts say.
For decades, low interest rates in Japan forced Japanese insurers and pensions to look overseas for higher-yielding assets – mostly U.S. Treasury securities – to match their long-term liabilities. Now, lifted by expectations of Japanese economic growth and the return of inflation after decades of falling prices, as well as concerns over rising public debt levels, yields on the country’s government bonds are increasingly attractive for its long-term investors.
That has the potential to remove a stable, less cost-conscious buyer from the U.S. Treasury market, said Tiago Figueiredo, a macro strategist at Desjardins, pushing global bond yields higher and boosting market volatility. Higher benchmark bond rates could raise the costs of Canadian mortgages, but some investors say they could also highlight the advantages of Canadian stocks.
“Longer term, the buyer of U.S. Treasuries is becoming a bit more price sensitive and that should result in a higher term premium,” Mr. Figueiredo said, referring to the additional compensation investors demand for holding longer-term debt. “Canada is not immune to that effect.”
Benchmark U.S. Treasury yields have already risen sharply this year in the aftermath of the initial U.S.-Israeli attack on Iran. The U.S. 10-year yield stood at 4.65 per cent on Thursday, up from 3.96 per cent at the end of February. The 30-year yield was at 5.22 per cent, rising from 4.63 per cent at the end of February, having recently touched 19-year highs.
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Analysts say rising U.S. yields primarily reflect investors’ assessments of continued U.S. economic strength, inflationary pressures linked to higher oil prices and longer-term fiscal and debt concerns. George Davis, chief technical strategist at RBC Capital Markets, said in an e-mailed response to questions that repatriation flows back to Japan had likely also played a role in pushing yields higher in recent months.
About 70 per cent to 80 per cent of the effect of rising U.S. yields typically translates into the Canadian bond market, Mr. Figueiredo said, “barring some uniquely Canadian driver.”
Canada’s 10-year yield touched 3.755 per cent on Wednesday, its highest level since May, 2024.
Despite a shrinking share over the past several years, Japan remains the single biggest holder of U.S. government debt, with total Treasury security holdings topping US$1.14-trillion at the end of May, according to U.S. Treasury data. That was down 3.6 per cent from the end of 2025.
At the same time, British holdings of U.S. Treasury securities rose to US$948.6-billion by the end of May, up nearly 10 per cent in 2026, while holdings by Cayman Islands investors rose nearly 12 per cent to US$471.3-billion.
Those jurisdictions, Mr. Figueiredo said, are typically custodial hubs for investors such as hedge funds with different investment mandates compared with “sticky” and “not very volatile” Japanese investors.
Mr. Davis said rising U.S. debt levels and eroding confidence in U.S. policy mean that the investors replacing Japanese insurers “will likely demand additional protection for their purchases – in the form of higher yields.”
He added that the demand for higher yields has been compounded by the Federal Reserve’s recent intervention to support the value of the yen. The Fed went against historical protocol by using euros, instead of dollars, to buy yen and only notifying the European Central Bank after the fact. The move “injected an incremental layer of uncertainty to markets,” Mr. Davis said.
For large Japanese insurers, higher Japanese government bond yields mean they can match long-term yen-denominated liabilities more easily in their home currency, avoiding the complication and cost of borrowing in foreign currencies and hedging against fluctuations.
In addition to the pull of higher yields, Japan’s Finance Minister said in July that the government hoped to push state pension funds to increase local asset investments, including bonds.
Canadian investors are unlikely to notice a direct impact from the shift. While Canadian government bond yields have risen, they remain below their U.S. counterparts because of what BMO chief economist Douglas Porter said in a recent note is a combination of “a lower overnight rate, somewhat milder underlying inflation trends and a less-fraught fiscal landscape.”
And while U.S. benchmark yields have risen, the 10-year yield remains around the 40-year average, said Craig Jerusalim, senior portfolio manager, Canadian equities at CIBC Asset Management. “I would say we’re in the ‘old normal’ period.”
Still, the rise in yields could weigh on highly leveraged sectors such as technology, utilities, REITs and telecoms, he said. That could provide a relative tailwind for Canadian stock indexes.
“If you look at the index composition of the TSX versus the S&P 500, we definitely have more of that winner’s bucket – the financials, energy and materials – and less of the REITs, utilities and specifically technology and communication,” Mr. Jerusalim said.
“I think Canada is very well positioned.”
With a report from Reuters