How JGBs outshine G4 peers on term spreads

Japanese government bonds (JGBs) have transformed from defensive assets to strategic opportunities, boasting the steepest yield curve among G4 peers and compelling hedged returns for global investors seeking yield and stability.

As global bond markets recalibrate in response to shifting monetary policies and inflation dynamics, Japanese Government Bonds (JGBs) have emerged as a compelling opportunity for both domestic and international investors. Once viewed as a low-yield, defensive asset class, JGBs are now offering competitive returns, particularly in the long end of the curve (chart below), while maintaining structural resilience that sets them apart from their G4 peers.

Weekly highlights

Source: Bloomberg, State Street Investment Management, as of October 30, 2025.

Yield curve steepening: Japan's new normal

The Japanese government bond (JGB) yield curve has steepened notably in 2025, following the Bank of Japan's (BOJ) exit from Yield Curve Control (YCC) in March 2024 and emerging supply-demand imbalances. As of October 2025, the 30-year JGB yield has climbed to 3.3%, while the 10-year yield has reached 1.7%—a 17-year high. This steepening reflects a combination of improving fundamentals, including stronger potential growth and inflation expectations, as well as a repricing of the fiscal term premium. Technical factors also play a role, with reduced bond purchases from both the BoJ and Japanese life insurers contributing to the shift.

Currently, Japan's 3-month—30-year and 5-year—30-year spreads hover around 200 basis points—by far the steepest among G4 economies, where comparable spreads are roughly half that level. In fact, Japan's curve is wider even when compared to Ba/B-rated high-yield option-adjusted spreads (OAS), offering a compelling cross-asset valuation contrast.

This positions Japan as a standout in terms of curve steepness, offering attractive duration plays for investors seeking long-term yield pickup.

Hedged yield advantage: USD, EUR, GBP, AUD perspectives

For foreign investors, the appeal of JGBs is amplified when returns are hedged back into their home currencies. This enhanced appeal, often 140~200bps above local sovereign alternatives, stems from favorable FX forward dynamics—driven by interest rate differentials between Japan and its peers—and favorable cross-currency basis swaps.

Structural strengths: Why JGBs are different

Japan's resilient fundamentals and stable sovereign debt profile stand out among developed markets, even amid recent political turbulence:

• Over 90% of JGBs are held domestically, primarily by banks, pension funds, and the BOJ itself. This reduces exposure to foreign capital flight and cushions against market shocks.
• Japsn remains the world's largest net creditor, over $3.7 trillion in external assets, providing a strong buffer against external financing risks.
• The household financial asset base is nearly double the national debt, reinforcing the country's ability to self-finance and maintain investor confidence.

These factors insulate Japan from the kind of bond market volatility seen in countries like the UK during the "Truss moment," where fiscal shocks triggered rapid sell-offs.

Investor positioning: Long-term opportunity vs risks

The steep JGB curve offers multiple entry points:

• Long-duration strategies can lock in elevated yields at the 30-year point, with elevated 5s30s spreads.
• Curve flattening trades may emerge in 2026 as the BOJ approaches its terminal rate and the Ministry of Finance adjusts issuance to address supply-demand imbalances.
• Foreign investors increasingly drawn to JGBs for their hedged yield premiums.

While the outlook is constructive, investors should monitor:

• Fiscal policy shifts, especially given the LDP's lack of majority in both chambers of the Diet, which could introduce volatility. Specifically, Takaichi has floated a 13.9 (T) yen stimulus package aimed at inflation relief through income tax exemptions and tax credits. However, the fragmentation in government could dilute these promises and dampen exuberance. Although fiscal measures could be stimulative for selective equity sectors Takaichi's policies fuel Japan's market rally, it also places further downward pressure on the Yen in the near term. Investors may consider FX hedging strategies to mitigate currency risk.
• Global policy rate direction, notably the Fed, which could impact FX hedging costs and  Hedged JGBs' relative appeal. The US Federal Reserve cut interest rates this week to 3.75~4.00% and the market is pricing in an additional 25 bps cut in December. SSIM projects an additional 50—75 bps in cuts through 2026, contingent on inflation moderation, labor market softness, and sub-trend growth. This trajectory is likely to reduce FX hedging costs, which would make Hedged JGBs relatively less attractive given lower hedge premium. This is however offset by duration gains from underlying domestic yields. A dovish Fed in general offers a cautiously supportive backdrop for fixed income as a whole including JGBs, though the outlook remains clouded by macro uncertainities. 

Conclusion: A new era for JGBs

Their higher absolute and hedged yields provide meaningful diversification benefits, and the opportunity cost of excluding JGBs from global portfolios is rising. Looking forward, 2026 and beyond presents a compelling setup: potential curve flattening and outright long opportunities in the belly of the curve, as Japanese banks begin deploying their 400 trillion yen in cash reserves amid the BOJ nearing its terminal rate especially if policy rate rises above the physiologically important 1~%.