Japan's 10-year at 2.930% closes the cheap funding leg in global fixed income

Japan's 10-year government bond yield reached 2.930%, its highest since September 1996, while the two-year at 1.690% and the five-year at 2.170% both set record highs ^[1][2]. The combination matters more than the headline: the front end, which is what yen-funded carry actually borrows at, repriced at the same time as the long end.

The proximate drivers cited were expectations of a Bank of Japan hike as early as September, plus higher oil prices tied to Middle East tensions and rising long-dated US yields ^[3][4]. Takehiko Nakao, former president of the Asian Development Bank, called for swift tightening and said it would not be unusual for Japan's benchmark rate to reach 2.25% to 2.5% ^[5]. Measure the curve against that. The two-year sits 56 basis points below the bottom of Nakao's range ^[3], and the 10-year is only 43 basis points above the top of it ^[2]. If he is right, the front end has further to travel and the long end has little term premium left to absorb it. The slope between 10-year and two-year is 124 basis points ^[1].

The complication is growth. Second-quarter real GDP grew 1.1% annualized against a market forecast of 2%, 0.9 points short ^[6][6], which is why September timing is not settled ^[6]. The fiscal arithmetic cuts both ways: Japan's government debt ratio exceeds 260% of GDP, and the interest-payment burden on that stock is itself described as a constraint on further hikes, a structure linked to prolonged yen weakness ^[7].

This is not a Japan-only long-end story. In the UK, where debt-to-GDP is projected to reach 103.6% this year, the 10-year yield spiked to 5.04%, the highest since July 2007 ^[8].

The more instructive part is what borrowers do once duration gets expensive. In Korea, yields on three-year AA-rated corporate bonds jumped to the mid-to-high 4% range, and issuers moved into convertibles: cumulative mezzanine issuance reached 8.8733 trillion won, already 4.2% above the full-year 2024 total ^[14][12][4], with convertible bonds about 84% of the volume ^[13]. Korea Aerospace Industries and Hyundai Engineering & Construction each issued 500 billion won of CBs at a 0% coupon, and Samsung SDS raised 1.22 trillion won ^[15]. That is large-cap issuers choosing to pay in equity conversion rather than coupon. Lee Se-hyun of NH Investment & Securities expects the channel to widen in semiconductors, defense, shipbuilding and power equipment ^[16].

Sovereigns cannot issue convertibles. Korea's national debt is 50.6% of GDP ^[9], with mandatory spending set to rise from 370.9 trillion won in 2025 to 465.7 trillion won in 2029, an average 5.9% a year and 25.6% over the period ^[10][5]. Kim Woo-cheol of the University of Seoul warned that total debt and interest rates rising together push interest spending up quickly and could obstruct fiscal management ^[11].

What to watch: whether the BOJ moves in September despite the GDP miss ^[3][6]; whether the two-year closes the gap toward 2.25% ^[2][5]; and whether 0% coupon convertibles keep clearing at that price ^[15]. One caveat on sourcing: these figures come from an AI-generated personalized briefing published by en.sedaily.com ^[17], so verify the levels against your own screens before repositioning.