Japanese Bond Yield Spike: Carry Trade Unwind Fears Assessed as Overstated

This analysis is based on the Seeking Alpha article [1] published on November 26, 2025, which addresses market concerns over a potential yen carry trade unwind following a spike in Japanese bond yields. On November 26, JGB yields rose sharply, with the 2-year JGB reaching 1% (a 17-year high) and the 10-year yield climbing to ~1.8%. While these increases fueled fears of global bond market instability and a broad carry trade unwind, real-time market data supports the article’s conclusion that fears are overstated [0].

The yen carry trade involves borrowing yen at low interest rates to invest in higher-yielding assets abroad. A carry trade unwind typically triggers a sell-off in risk assets (as investors liquidate positions to repay yen loans) and strengthens the yen (due to increased demand for repayment). However, the Nikkei 225 index—Japan’s key equity benchmark—rose 1.12% on November 26 [0], rebounding from a 0.92% decline the previous day, contradicting this expected sell-off. Additionally, the USD/JPY exchange rate showed the yen weakening in the days following the yield spike, further undermining unwind fears.

Central bank policy plays a critical mitigating role. The BOJ is expected to implement rate hikes gradually, with board members emphasizing cautious action. This gradual approach limits the risk of sharp yield increases that could force carry trade unwinds. Furthermore, expectations of Federal Reserve rate cuts have weakened the U.S. dollar, enhancing returns from U.S. assets when converted back to yen and supporting the carry trade’s viability.

1. Market Reaction Contradicts Unwind Fears
   : The Nikkei’s rebound on November 26 indicates investors are not actively unwinding carry trades despite JGB yield spikes, challenging the initial fear narrative.
2. Dual Mitigating Factors
   : The BOJ’s gradual policy trajectory and the U.S. dollar’s weakness offset the impact of higher JGB yields on carry trade costs and returns.
3. Data vs. Rhetoric Disconnect
   : The initial concern about a carry trade unwind overlooks real-time market dynamics, highlighting the importance of cross-referencing yield movements with equity and forex market reactions.

• Risks
  : Faster-than-expected BOJ rate hikes or a sudden strengthening of the yen could still trigger a partial carry trade unwind, creating short-term volatility in global risk assets.
• Opportunities
  : The Nikkei’s rebound reflects investor confidence in the BOJ’s gradual approach, presenting potential opportunities for those who share the view that carry trade fears are overstated.

• JGB yields spiked to multi-year highs on November 26, 2025, sparking carry trade unwind and bond market stability fears.
• The Seeking Alpha article [1] argues these fears are overstated, supported by the Nikkei’s 1.12% rise on November 26 [0] and concurrent yen weakness.
• The BOJ’s gradual rate hike expectations and Fed rate cut anticipation reduce the likelihood of a broad carry trade unwind.