The top foreign holders of U.S. debt may soon dump Treasury bonds and bring their money back home, potentially spiking borrowing costs

For decades, Japanese government bonds offered minuscule returns, forcing investors there to look abroad, especially at U.S. financial markets.

Japanese investors now collectively own about $1 trillion in Treasuries and are the largest foreign holders of U.S. debt.

But that could change soon as the Bank of Japan has been hiking rates while hotter inflation has lifted JGB yields, which are now looking more attractive and emerging as an alternative to Treasury bonds.

Yields for 10- and 30-year JGBs have soared to the highest levels since the 1990s, and the central bank is expected to tighten for the fifth time since 2024 as the Iran war sends oil prices higher.

Meanwhile, Prime Minister Sanae Takaichi is seen boosting government spending as part of her efforts to revive growth and offset the oil shock, adding to inflationary trends.

Of course, U.S. yields have also risen as inflation picks up. But the Federal Reserve’s next move is still expected to be a rate cut, though that timeline is getting pushed back further, perhaps into 2027.

There are already signs that money is being repatriated as March saw the largest monthly inflow ever into Japanese sovereign bond funds.

“The new money that’s being put to work won’t be put to work overseas,” Mark Dowding, chief investment officer at BlueBay, told the Financial Times<...