A key role Japan has long played as an "invisible stabilizer" in global bond markets may be approaching a turning point, with US Treasury bonds likely facing the most significant impact. Japanese investors and institutions rank among the world's largest foreign holders of sovereign debt. By the end of 2024, Japan was the top foreign holder of US Treasury securities, accounting for 12.4% of foreign-held federal debt, a total exceeding $1 trillion. Japan is also a major holder of sovereign bonds issued by European and Asian governments. The primary attraction for Japanese investors has been the relatively higher yields available in countries like the United States, Germany, and the UK, coupled with the political and economic stability of these nations. Bond yields move inversely to prices. Concerns about a government's fiscal policy can trigger large-scale sell-offs of its bonds, thereby pushing yields higher. Japanese bond yields had persisted at extremely low levels for a long time. However, since Saana Takemachi assumed the role of Prime Minister in October, her tax cuts and spending plans have prompted a sell-off in Japanese government bonds. The yield on Japan's benchmark 10-year bond recently stood near 2.12%, retreating in recent weeks after touching a three-decade high. Over the past year, the yield spread between Japanese and US 10-year bonds has narrowed by approximately 115 basis points. The spread with UK gilts has narrowed by about 92 basis points, and the spread with German bunds has narrowed by roughly 45 basis points. Nigel Green, CEO of wealth advisory firm deVere Group, warned that investors do not yet appear to have fully priced in the potential ripple effects of rising Japanese yields on global bond markets. He stated that for years, Japanese institutions were "forced to invest overseas because domestic yields were virtually negligible," but "persistently higher domestic bond yields" are changing this dynamic. "Sustained reallocation of funds back into Japanese government bonds could well be enough to shake global pricing," Green told CNBC. "Japan has been a structural buyer of US Treasuries and major developed market bonds. If that buying diminishes, yields will head higher." deVere Group anticipates this shift will lead to persistently higher risk premiums for long-term bonds, steeper yield curves in major markets, and a significant tightening of global financial conditions. "For a whole generation, Japan has been exporting its savings to the world. If more of those savings stay home, global bond markets will lose a major invisible stabilizer," Green added via email. "Markets are still behaving as if Japan's volatility is a temporary disturbance, not a paradigm shift. We believe this is a mistake." He cautioned that due to the sheer scale of Japanese holdings, US Treasuries face the highest risk, followed by European sovereign bonds, where fiscal situations are already strained. "Any market for duration assets that has relied on steady Japanese buying will face vulnerability," Green said. Derek Halpenny, Head of Research for Global Markets EMEA and International Securities at Mitsubishi UFJ Financial Group, told CNBC it is "entirely rational" for Japanese investors to consider keeping more funds in their domestic bond market. "We don't think a specific yield level is necessarily the catalyst," he said, suggesting other factors, such as growing investor confidence in Japan's economic management, are more important. Halpenny noted that since taking office, Prime Minister Takemachi has been building a case for future prudent fiscal policy management, which has helped yields pull back somewhat. However, he added that the market consensus is that the Bank of Japan's monetary policy remains too accommodative, requiring two to three more interest rate hikes to restore bond investors' confidence in the central bank. In 2024, the Bank of Japan concluded a decade-long stimulus program and implemented multiple rate hikes. In January of this year, the bank held its benchmark rate steady at 0.75%, following an increase the previous month to its highest level since the 1990s. "Conditions for an improvement in sentiment among Japanese government bond investors are approaching as rates rise and inflation falls," Halpenny said. "But a major domestic investment shift is unlikely to happen suddenly barring a shock. Therefore, we view this as a more gradual process: new investments staying home and investors gradually increasing their allocation to Japanese government bonds." He added that his team is monitoring fund flows from pension funds like the Government Pension Investment Fund (GPIF), but current data does not yet indicate a shift has begun. At the end of the third quarter of fiscal year 2025, 50% of GPIF's assets were allocated to bond markets, with nearly half of that invested in foreign bonds, amounting to 72.8 trillion yen (approximately $470.6 billion). James Ringer, Portfolio Manager of Schroders' Global Unconstrained Fixed Income fund, told CNBC that the potential repatriation of Japanese funds is a risk requiring continuous monitoring, given the level of Japanese government bond yields. "But it's not just about the yield," he said. "Japanese government bond volatility remains relatively high, and liquidity is relatively low. Both aspects would need to improve before a major repatriation occurs, especially for some Japanese investors." He added that the post-pandemic era continues to highlight the value of diversification. "By investing overseas, Japanese investors achieve diversification and gain access to a vast pool of high-grade, highly liquid fixed income markets," Ringer said. deVere's Green pointed out that even if Japanese investors maintain their overseas holdings, the change in Japanese bond yields could still have an impact. "Japan was proof that ultra-low interest rates could persist indefinitely in a developed market. It set a floor for market expectations, but this dynamic appears to be shifting." "Once the last holdout normalizes, the logic for yields being permanently suppressed everywhere else weakens. Therefore, investors should consider pricing in the possibility that interest rates in developed markets have structurally shifted higher." Green further noted that Japan has historically provided stability through predictability, with domestic investors holding the bulk of government debt, "creating a reliable, price-insensitive holder base." "If this system becomes more yield-sensitive and volatile, it will alter the overall tone of the global fixed income market."