Nvidia has cemented its dominant market position and significantly exceeded analysts’ expectations in the third fiscal quarter ending October 2025. With revenues of USD 57 billion, the result was more than USD 2 billion above analyst expecations. The revenue outlook of USD 65 billion for the coming quarter also significantly exceeded market expectations.
In light of the impressive results and the apparent acceleration in demand for chips, concerns about a tech bubble bursting seemed to recede again for many market participants, at least in the short term. However, overshadowed by the discussion about the US tech sector, a potential financial storm is brewing in Japan, the effects of which could be serious for international bond markets.
Yields on Japanese government bonds (JGBs) have risen sharply in recent trading days. The yield on 30-year JGBs has risen to an all-time high of over 3.3 percent. Given the significantly higher yields that investors are currently demanding for long-term loans to the US government – the yield on 30-year US Treasuries is 4.7 percent, a whopping 130 basis points above the equivalent yen-denominated securities – fewer investors are currently taking note of developments in Japan. But they should, given the peculiarities of Japanese fiscal policy: after the real estate bubble burst in the 1990s, the Japanese economy struggled for decades with weak economic growth and stagnating prices. This situation went down in financial market history as “Japanification.” Starting in 2012, Prime Minister Shinzo Abe’s “Abenomics” policy focused not only on structural reforms but also on aggressive monetary and fiscal stimulus, which meant negative key interest rates for a long period of time and, due to the purchase of its own government bonds, led to the highest debt ratio of any industrialized country, at times exceeding 250 percent of economic output.
As the spell of deflation has been broken since 2022 and the inflation rate rose above the central bank’s target of 2 percent, the current Prime Minister, Sanae Takaichi, is planning a new stimulus program with a volume of reportedly up to USD 135 billion. The aim is to make it easier for private households to cope with the unusually high price increases in order to stimulate consumption and growth. The hope is that the package will be financed on the one hand by rising tax revenues, but on the other hand also by even greater debt through the issuance of additional government bonds. However, this is precisely what was causing the recent rise in yields. Japan’s debt level is still over 230 percent of economic output. Additional bond issues would therefore place a further burden on the national budget. In addition, the Bank of Japan’s planned interest rate hikes to curb inflation are also causing concern in view of the resulting debt service.
However, a possible further rise in yields on Japanese government bonds is not only a national challenge. It could also have a negative impact on the US financing structure in the medium term. For years, investors have been taking advantage of extremely low interest rates in Japan to take out cheap loans in order to buy US government bonds with significantly higher interest rates. This so-called “carry trade” and the trade surplus with the US have led, among other things, to Japan becoming by far the largest creditor of the US, currently holding Treasuries worth USD 1.19 trillion. Higher interest rates on Japanese bonds could now lead to a rethink among investors and thus to lower demand for US government bonds. This would be an untimely development for the US administration, as the Americans will also be placing a significantly larger number of government bonds on the market in the future due to their growing mountain of debt.
In addition to the major technology companies and long-term bond yields in the US, it is therefore advisable, particularly in the current environment, to keep a close eye on developments in Japan. Given the enormous levels of government debt in Japan, the US, and also France, for example, a sudden increase in volatility in government bonds cannot be ruled out, especially in view of the dynamic developments in Japan. At the same time, we continue to believe that the risk premium on corporate bond yields – known as credit spreads – are far too low. From our perspective, it therefore continues to make sense to focus on liquidity, credit quality, low probability of default, and low interest rate risk in the bond sector.
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