After a week that saw 10-year Japanese government bonds (JGBs) hit yields not seen since the late 1990’s (and record highs for 30-year and 40-year maturities), alongside one of the most interesting Davos conferences in years, which was held in the shadow of the latest push by President Trump to “acquire” Greenland, it is helpful to take stock of where this leaves the global geopolitical landscape and financial markets.
Starting with the sell-off in JGBs, which generated a lot of headlines, and although yields had been rising since the Bank of Japan began loosening its yield controls and raised rates in March 2024, the sell-off accelerated after Prime Minister, Sanae Takaichi, took office in October 2025. As background, Takaichi supports an expansionary fiscal policy, aimed at driving economic growth through government stimulus and spending, which unsurprisingly raised concerns among JGB investors. With soaring personal poll ratings, Takaichi, who came to power by winning the leadership race for the ruling Liberal Democratic Party, called a general election for the 8 February, to secure a public mandate for her plans.
With nerves already frayed, when Takaichi announced the acceleration of discussions to reduce consumption tax on food items for 2 years, which could cost approx. $32bn of lost annual revenue, these potential fiscal changes combined with inflation concerns, combined to push JGB yields aggressively higher.
This move came just as President Trump ramped up rhetoric on Greenland, threatening further tariffs on a range of European countries unless they supported his claim to the territory, a move that further widened the rift between the US and many of its NATO allies. Although the move in JGBs was probably the biggest driver, these tensions helped fuel a global government bond sell off, which briefly took 10-year Treasury yields above 4.3% and 30-year maturities close to 5%, and their recent near 20-year highs.
Trump’s speech at Davos did little to calm nerves, as he lambasted various world leaders and insisted that only the US could protect Greenland. However, reminiscent of many Trump policies, a swift about-turn was executed hours later, with the announcement on Truth Social that he and NATO Secretary General, Mark Rutte, had formed a framework for a future deal over Greenland. Markets quickly rallied on the news, with US Treasuries(USTs) regaining much of the ground lost earlier in the week.
Given the volume of rhetoric, it is difficult to disentangle geopolitical risks, fiscal worries, and renewed trade war concerns, when dissecting the move in global rates. However, for fixed income investors, and particularly for rates investors, several things are becoming clearer.
First, with JGB yields having been so low for so long, interest from international investors has, in recent years, been mostly to do with carry trades using short Japanese rates as funding currency. Traditional asset managers showed little interest in building long positions across the Japanese curve. Given the move in rates, JGBs are becoming a “market” again for international investors, and the impact of this could be significant. Japanese investors are the biggest international holders of UST, with approx. $1.2tr held. While this is not critical to the US market, which is ~$30tr in size (or $20tr excluding 1-year bills), a rotation away from USTs, into JGBs, already discussed by some Japanese insurers, would remove some of the technical support for USTs. Over time, JGBs will also provide another option for international investors, not just as an alternative to US Treasuries but as an additional source of duration. In addition, the Japanese sovereign bond market is a marginal supplier of long-dated duration – the amount that institutions absorb domestically, rather than push out globally, will have impact long-dated bonds everywhere.
These developments refocus attention on global rate markets, where most investors look for their go-to risk-off options. The obvious question is whether government bonds still function as a safe haven in periods of stress? The answer, we think, is “Yes, but...” and the “but” is growing. Developed market government bonds reputation as safe havens have been under threat for a few years from a multitude of factors. Inflation remains too high, and persistent, in many regions, excluding the Eurozone, which has significant required defence spending requirements and a much less friendly US administration. Fiscal concerns remain front and centre, with the threat of bond vigilantes ever present since the rate hiking cycle in 2022. Tariff fears last year generated significant volatility but ultimately drove UST yields to highs that forced President Trump to back down significantly. However, they remain his go to option to exert influence. Meanwhile, fears surrounding the independence of the Federal Reserve continues to weigh on long-term yields. All of this has led to UST term premia developing again, and now stands at 60bps, from zero in late 2024, according to the Federal Reserve’s Kim & Wright Model.
The last few years have seen a breakdown in traditional correlations. The relationship between risk-on credit assets and US Treasuries has become predominantly positive, whereas it was largely negative in the past. While this is not surprising during a rate-hiking cycle, central banks have been more accommodative recently, yet heightened macro volatility has not consistently triggered a risk-off response in rates.
In some ways, a risk off asset hasn’t been required, as credit spreads have continued to tighten and volatility across risk markets has remained low. Nevertheless, it creates challenges for fixed income investors, who might traditionally have utilised a somewhat barbell approach, with risk-on assets, balanced with a position in medium-to-long dated rates. In this new environment, we think risk assets must also do some of this heavy lifting, by being higher quality, globally diversified, and carefully positioned along the government bond curve.
Will government bonds provide a haven in a major risk off event, such as Covid, or negative GDP growth? We have no doubt they will. But in an increasingly unpredictable world, where geopolitical risks are developing, driven by tariffs, energy, security concerns and domestic agendas, the cause & effect conundrum isn’t as clear cut as it used to be. Rates will of course still play a vital role in portfolio construction, but their purpose is shifting.
