Signs of bond buying emerge as megabanks and insurers move in

2026-08-13

Unusual bank money

Japan's super-long bond market is showing signs of easing after a run-up in yields. As the newly issued 30-year bond yield fell to around 4%, megabanks began considering purchases, and similar moves are spreading among major life insurers.

'A 4% yield on 30-year bonds is an attractive level,' a senior megabank executive said in early August. Speaking in the week after the joint U.S.-Japan currency intervention, the executive said yields could still rise further, but the investment appeal was already sufficient. Other major banks have also signaled they are starting to buy 30-year bonds.

It is unusual for major banks to buy super-long bonds. In a rising-yield environment, the risk of larger valuation losses is significant, and they have long avoided them. With shorter-term liabilities in the form of deposits and lending opportunities for their funds, banks have been shortening the maturity of their government bond holdings during the Bank of Japan's policy normalization. Current holdings are almost none.

Cooling after the surge

The reason banks are moving to buy is that the upward momentum in super-long bonds has begun to slow. The newly issued 10-year government bond yield briefly reached 2.875%, and the market is increasingly watching for a move into the 3% range. Medium-term bonds, which tend to reflect expectations for BOJ rate hikes, have also risen sharply. On the 13th, the yield on newly issued five-year bonds hit a record high of 2.125%, while the newly issued two-year bond yield rose to 1.645%, the highest level in about 31 years since May 1995.

By contrast, the newly issued 30-year bond yield briefly fell to the 3.8% range after the coordinated currency intervention by the two governments. It has since returned to the 4% range, but the pace of increase has slowed compared with the recent highs seen in mid-May and early July. In July, Finance Minister Satsuki Katayama said she wanted to support expanded investment by pension funds, including GPIF, in Japanese financial assets. That fueled expectations for higher domestic investment, prompting buying in government bonds and briefly pushing down super-long yields.

GPIF manages about 300 trillion yen in assets. Market estimates suggest that even a 5% review of asset allocation could move funds on the order of 15 trillion yen. Several financial executives say the scale could far exceed currency intervention, which is said to total 5 trillion yen per operation.

Insurer interest spreads

Some argue it is still too early to say bank money will flow into the super-long bond market in earnest. Among major banks, views are split between aggressive and cautious camps. Another senior bank executive said banking has traditionally focused on maturities up to the medium term, and that 30-year bonds should be approached carefully. Deposits are nearing a plateau, while demand for lending to domestic companies remains, so banks are not in a position to move en masse into government bond investment.

Even so, the significance of a megabank being named in a market long dominated by life insurers, pension funds and overseas investors is substantial. That is because it could trigger a chain reaction of buying interest among insurers and pension funds. At Sumitomo Life Insurance, the buildup of super-long bonds to prepare for the new capital rules from fiscal 2025 has largely run its course, but about half of the new funds generated by higher sales of yen-denominated savings insurance are being channeled into Japanese government bonds. Tadakazu Izumi, head of investment planning, said 30-year bonds would be easier to buy if yields around 4% confirm confidence in fiscal management and the BOJ does not appear to be falling behind the curve.

Potential stabilizer

These moves could help stabilize the super-long bond market. If expectations for BOJ rate hikes intensify, upward pressure should remain on two-year and five-year bonds, but in the 20-year and 30-year segments, high yields are starting to draw buyers back in. If life insurers resume adding to holdings while watching the major banks, there is room to soften price moves driven by overseas investors.

The impact is not limited to the bond market. The yield gap between Japan and the United States remains wide, but if GPIF, pension funds and insurers increase allocations to domestic assets, it could help ease pressure to sell the yen. Still, concerns over the aggressive fiscal stance of Prime Minister Sanae Takaichi's administration remain, and depending on government bond issuance, long-term yields could rise again. Even with a new buyer such as banks entering the market, the prerequisite is that confidence in fiscal policy is maintained.

Since the 2010s, Japanese institutional investors have increased foreign bond investment against a backdrop of ultra-low interest rates. If the super-long bond market, which has become more volatile on overseas trading, settles down through an influx of bank money, it could also mark a turning point that draws long-term funds back to Japan.

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