Summary of this article
Japan 10-year bond yield tops 3% since 1996.
Uday Kotak warns investors of impending market turbulence.
Spiking global yields could pressure Indian equities and bonds.
Global financial markets are seeing a shift, as benchmark borrowing costs in major economies have breached levels not seen in three decades. Both Japan and the US have seen bond yields surge to historic highs.
Notably, Japan’s 10-year bond yield has surpassed the 3 per cent mark for the first time since 1996. The uptick in yield is being led by increasing government debt burdens and ballooning fiscal deficits, which in turn are making investors to demand a higher premium to lend their money.
Commenting on the development Uday Kotak, chairperson of Kotak Securities, however, cautioned investors to be ready for a ‘roller coaster ride’. Taking to the social media platform X, Kotak sounded an alarm about the effects of rising bond yields.
”Japan’s 10-year bond crosses 3 per cent and the US 4.8 per cent. As their government debt and deficits go up, central banks may have no option but to expand balance sheets (print money). If so, inflation goes up, short end rates go up. Be ready for a roller coaster ride in interest rate markets!” Kotak wrote in his post.
Why Are Bond Yields Rising
On September 2, 2026, Japan’s 10-year government bond yield crossed the 3 per cent threshold for the first time in three decades. Additionally, around the same time, the US 10-year Treasury yield surged past the 4.80 per cent mark, reaching its highest point since January 2025.
A bond yield is the return an investor makes for lending money to the government. However, when the government faces a massive deficit, it has to issue more bonds to cover its expenses. As the supply of these newly-issued bonds hits the market, the issuers have to offer higher yields to make the bonds lucrative for investors. Ahead of the September 16, 2026 US Federal Reserve meeting, the probability of a rate cut is edging strongly in favour of a rate cut at 70.2 per cent, while the odds of rates remaining the same or being cut are lower at 29.8 per cent.
In the US, government spending combined with an economic slowdown has increased the probability of the US Federal Reserve not cutting interest rates anytime soon. On the other hand, in Japan, the economy has had stagnant growth for multiple decades. In 1996, yields traded above 3.40 per cent in early 1996 before falling below the 3 per cent threshold later that year. The yield plummeted to a low near 0.80 per cent by 1998. For the remainder of the decade (1996-2006), rates oscillated within a range of 1-2 per cent.
Starting near 2 per cent in 2006, the yield entered a downward trend following the 2008 Global Financial Crisis. Yields fell below 1.50 per cent in 2009 and drifted lower over the next five years, as domestic economic momentum stalled and global central banks loosened policy. By 2015, yields were hovering below 0.40 per cent, culminating in an unprecedented plunge below nil in early 2016, when Bank of Japan introduced negative interest rates.
Between 2016 and 2020, yields remained pinned between -0.30 per cent and 0.10 per cent under the Bank of Japan’s strict Yield Curve Control framework. However, after 2021, yields turned positive and began climbing toward 0.50 per cent.
From 2023, rising inflation and the rollback of yield caps made the yield cross 1 per cent in 2024, climbing past 2 per cent in 2025, before completing a full three-decade round trip by crossing back over the 3 per cent mark in 2026. To counter inflation, the Bank of Japan has stepped back from its aggressive policies of buying bonds to keep yields artificially low.
‘Roller Coaster Ride’ Ahead for Indian Investors?
These international developments have consequences for domestic bond market investors. Typically, when safe bonds like Japan’s 10-year bonds start offering high returns, it attracts global capital. If an investor can earn a high yield in the US or Japan, they are much less likely to take a risk on emerging markets, such as India.
Thus, in order to prevent the flight of capital from India, local interest rates typically have to rise when global rates go up. Since bond prices and yields tend to move in opposite directions, a rise in new interest rates means that older bonds paying lower rates might become less lucrative.
An investor looking at their portfolio may see the market price of their existing holdings drop, resulting in short-term paper losses. However, for those looking to invest afresh, the rising rate environment can potentially allow domestic bond buyers to lock in new, elevated yields.
The effect of the bond market is also likely to spill over into the equity market. If domestic borrowing costs increase to keep pace with the US and Japan, local companies face higher expenses to fund their operations.
However, investors must note that, so far, the Reserve Bank of India (RBI) has kept interest rates unchanged since December 2025. In its latest meeting, the RBI’s Monetary Policy Committee (MPC), kept its stance neutral, maintained the repo rate at 5.25 per cent, and expressed that it is in a wait-and-watch mode.
To conclude, domestic investors holding a mix of debt and equity should navigate the environment by preparing themselves for a tightening in global liquidity and volatility in both bonds and stocks, while remaining on the lookout for fresh investment opportunities amid an evolving market landscape.
