Has Japan quietly become a key source of recent rate volatility?

Much of the recent sharp and sometimes puzzling rate volatility observed across global fixed income appears to stem from a structural change in investor behavior in Japan rather than from central bank policy shifts. The US 10-year yields have traded in an exceptionally wide 70-90bps range since the third quarter of 2024, while 30-year intraday moves of 15-20bps, typically associated with major macro events, have occurred without clear catalysts.

When a market that holds more than USD 3 trillion in foreign bonds starts to pull back, curves move, liquidity thins and volatility rises. For Nordic credit investors, this helps explain why USD and EUR 30-year swap rates have swung by 40-60bps within weeks, while the Nordic credit complex, especially its FRN-dominated segments, has remained comparatively stable with spread moves largely contained within plus or minus 5-10bps.

Japan’s structural shift away from global duration

Japanese life insurers, pension funds and banks have for years been reliable buyers of long-dated US Treasuries, Bunds and other high-grade global bonds. At times, they absorbed 10-15% of annual net US Treasury long-end issuance and held nearly USD 1.2 trillion of foreign sovereign bonds at peak.

Their demand was driven by a simple formula: near-zero domestic yields, low hedging costs and attractive post-hedge carry.

That formula no longer holds:

• Japanese 10-year JGB yields have risen from 0.0-0.1% under Yield Curve Control (YCC) to around 1.0-1.1% today, making domestic duration substantially more attractive.
• USD/JPY hedging costs have surged from around 50bps in 2021 to 450-500bps annually, meaning once-profitable US Treasuries now deliver negative post-hedge carry.
• FX volatility has risen sharply, with 1-month USD/JPY implied volatility doubling from around 7% to 13-14%, increasing balance sheet costs and reducing appetite for foreign duration.

This shift does not require aggressive selling from Japan to move markets. A change from a large and consistent buyer to one on the sidelines is enough to remove a major anchor in the global duration complex. Because Japanese institutions concentrate in 10- to 30-year maturities, representing more than 60% of their foreign bond holdings, their retreat is felt most sharply in the long end, where recent volatility has been most pronounced.

How this drives global yield swings

The impact of Japan’s repositioning is both mechanical and behavioral.

1. Reduced long-end demand lifts term premia

In the US and euro area, Japanese investors have historically absorbed a meaningful share of long-dated issuance. When that demand weakens, curves steepen and long-end yields reprice quickly.

In recent months:

• US 30-year yields have repriced by 60-80bps, even as macro data remained broadly stable.
• EUR 30-year swap spreads have moved 20-30bps, far beyond typical seasonal volatility.

2. FX dynamics reinforce the shift

Repatriation flows, estimated at USD 150-200 billion over the last 12 months, have supported the yen, making hedging even more expensive and reinforcing the preference for domestic JGBs. This creates persistence in the new flow pattern.

3. The market tests new equilibrium levels

With a long-standing stabilising buyer absent, volatility rises as other investors reassess fair-value yields for long duration.

Recent market behavior illustrates this:

• Treasury depth at the 30-year point has fallen by around 30%, increasing the price impact per unit of flow.
• Intraday yield moves above 10bps now occur two to three times more frequently than historical averages.

These dynamics have been visible across the US Treasury market, core Europe and traditional Japan-heavy destinations such as Australia and New Zealand. Emerging market sovereigns, which are more flow-sensitive, have seen swings of 30-70bps daily in higher-beta hard-currency bonds, highlighting broader spillover effects.

Why Nordic credits are far less affected

For a Nordic credit investor, the point is not that Japan matters but that it matters far less here than in most global markets.

Japanese institutions have near-zero strategic allocations to Nordic sovereigns, covered bonds or corporate credit. For example:

• Japanese investors own less than 1% of Swedish and Norwegian government bonds.
• Nordic corporate bond markets receive virtually no structural Japanese participation.

There is therefore no forced selling and no structural reduction in foreign demand.

A uniquely stable domestic investor base

Nordic markets are anchored by insurers, pension funds and banks whose liabilities and regulatory frameworks naturally absorb volatility. Domestic investors typically account for 70-80% of local credit demand, providing notable resilience even when global volatility rises.

The FRN advantage

The Nordic credit market, particularly in SEK and NOK, is dominated by floating-rate notes, which materially reduce duration risk:

• More than 65% of SEK and NOK corporate bonds are FRNs, compared with around 15-20% in EUR markets.
• FRNs significantly insulate portfolios from long-end swings, with rate beta often below 0.2 compared with benchmark.
• Mark-to-market volatility is materially lower, and carry improves as policy rates remain restrictive.

This combination explains why Nordic credit spreads and valuations have remained orderly despite turbulence in global sovereign curves.

“Nordic credit stands out as one of the few fixed income markets largely insulated from the global rate volatility unleashed by Japan’s retreat from long duration.”

Conclusion: a global source of volatility, a regional source of stability

Japan’s pivot away from global duration has become an underappreciated driver of rate volatility. Its effects are most visible in markets where Japanese investors historically played a meaningful role, including US Treasuries, euro area duration, AUD/NZD and parts of emerging markets.

The Nordic region sits structurally outside this dynamic, supported by negligible Japanese ownership, strong domestic investor sponsorship, robust credit fundamentals and a market architecture built around low-duration FRNs.

In a world where long-end global rates may continue searching for a new equilibrium, Nordic credit stands out as one of the more stable and predictable segments of global fixed income, offering spread, quality and resilience at a time when many other markets are recalibrating to Japan’s changing behavior.