Let's keep an eye on Japan (and yields) in 2026.

December 8th, 2025

Thoughts of the Week

Nobody talks about Japan, but we will. Last week the President of Japan's central bank said that they could start increasing interest rates as inflation has, at last, stabilized at relatively high levels. Now for them, this is a good thing, because Japan has been plagued by deflation (i.e. negative inflation) for more than 30 years. At the same time, the new government also announced plans for increased spending, at a time when both debt/GDP and fiscal deficit are at extended levels. The Japanese 10yr bond yield spiked to 2% in response, the highest since 2007 and the 20yr is close to 3%, the highest since 1998 ! Financial markets sold-off for a few hours, but decided that they do not care (for now).

Higher Japanese yields could result to a stronger currency, threatening leveraged positions. First of all let's note that the Japanese yen has been the darling of hedge funds and speculators as a funding source for their leverage, i.e. they borrow in yen at zero interest rate, convert it into euros or dollars and they buy an asset that has momentum, whether this is Bitcoin, Quantum-computing stocks, Nvidia or just the Nasdaq. Any meaningful change on the loan-side of the trade (i.e. higher interest rates and/or a rally of the currency) will cause pain and the funds/speculators will have to close both sides of the trade. This means buying back the yen and selling the stocks they own.

Another issue is Japan's net international investment position, north of +3.5 trillion $, making it one of the world's largest creditors. This is the product of thirty years of zero to negative rates, with capital continuously moving into foreign assets for yield. If the Japanese yields move sustainably higher and the currency gains momentum, the local savers, investors and pension funds could start repatriating their yen (i.e. start selling foreign assets and currencies) in order to invest into Japanese bonds which have started yielding something instead of nothing. This would exert a lot of upward pressure on the yields of western bond markets, which could then trigger a negative spiral.

The issue is that higher yields globally is a theme nobody talks about, but it is already happening. And it is not only linked to Japan. The demand-supply equation is crucial to determine where yields are heading into 2026. A large increase of supply of bonds happens when governments increase their borrowing, just like Germany and Japan are about to do in 2026, among other nations. On the demand side, we have the big reform of the Dutch pension scheme which will reduce buying in the long-end of the EUR curve and the ECB is no longer a buyer. It is, hence, no surprise that German yields have been moving steadily higher (bond prices lower) in 2025. Last but not least, everyone is betting that the USD interest rates are going to move significantly lower, due to labor market weakness. With inflation creeping higher and the Japanese "threatening" to sell their US Treasuries, very few investors are prepared for a spike in USD yields, and definitely the US equity market is not priced for that.

When yields rise, equities are impacted as well. The yield of the "risk-free" bonds, i.e. the likes of German Bunds or the US Treasuries are used by analysts and the investment community to estimate the fair value of a company, whose future cash flows are discounted to the present. The higher the denominator (the interest rate), the lower the fair present value of a stock, all other things being equal. A 1% rise in the 10yr US Treasury yield can lead the fair value (and price) significantly lower, without any single change in its growth prospects/earnings. The growth stocks, like Technology, whose future cash flows increase significantly are the most impacted in this case.

The choice for the next Chairman of the FED could also create volatility in the global bond market. Last week, the US administration cancelled the scheduled interviews with the short-listed candidates and President Trump said that he has made up his mind, with his decision expected early next year. The term of Mr. Powell ends in May 2026, and the favorite to replace him is longtime Trump's economic advisor Mr. Kevin Hassett. According to the Financial Times, many Wall Street CEOs and bond fund managers met the US Treasury Secretary to voice their concerns on this choice. The fear is that Mr. Hassett becomes a puppet of Trump and the FED loses both independence and credibility.

All in all, we are not saying that we should get rid of all bond holdings. On the contrary, they are needed for reasons of income and protection for the bad scenario of a recession or a geopolitical event. We are just explaining in more detail the view we had for several months now to avoid long-term bonds, whose price would be impacted most in the above scenarios and we also highlight the case of owning primarily the highest quality of bonds. Emerging market debt also looks rather insulated, given the significant progress of the local economies in terms of fiscal discipline and debt evolution, whereas in most parts of the western world these two are deteriorating.

What caught our attention

Eurozone November inflation was muted, as expected. Although the headline number edged up by 0.1pp to 2.2% y/y (vs. expectations for 2.1%), the core inflation remained stable at 2.4%, better than the expected 2.5%. The headline number's miss came almost entirely from higher than anticipated energy prices and was attributed to smaller countries, as France, Spain, Italy and the Netherlands had already published positive surprises. The data cemented the view that the ECB is on hold for the moment, something that will be confirmed next week, at the last meeting for this year.

Swiss inflation surprised to the downside, falling 0.1pp to 0%. The decline was driven by domestic inflation which fell to 0.4% y/y, while imported inflation which is the barometer for the pass-through of the CHF moves remained unchanged at -1.3% y/y. The SNB meeting on Thursday will gather attention, as negative rates could once again be discussed, although recent comments by SNB board members mentioned that even temporarily negative inflation prints would be tolerated.

The US labor market data continue to mess up economists' brains. The ADP US November payrolls (private employment) fell in November (-31k), lower than expectations and the three-month moving average is now at -3k per month. Essentially the ADP survey shows that private employment is in a mild recession. In contrast, the weekly jobless claims compiled by the government agency BLS fell to 191k, the lowest since 2022, showing a robust labor market, far from a recession. Then again, the Challenger report (again a private company) showed that on a year-to-date basis 1.1mn people have lost their jobs, which is the highest since the pandemic year of 2020.

The US National Highway Traffic Safety Administration, proposed to significantly lower the fuel economy requirements requiring 34.5 miles per gallon on average by 2031, down from 50.4 miles per gallon. Speculation also rose about a similar change in the EU where the year 2035 has been set as the date when all new cars and vans sold in its members states must be zero-emission vehicles. According to people with knowledge of the matter, an announcement could come in the next several days and this should be very positive news (... for the auto manufacturer's stocks, not the environment). Given these reports, it is no surprise that European auto-makers continued to rally last week.

Markets reaction

Global equities continued mildly higher, after the previous explosive week. The S&P500 rose by 0.2% as Russell 2000 (+0.9%) outperformed. In Europe, the picture was more mixed as German and Swiss stocks rose by 0.8%, but France and the UK posted marginal losses for the week. The defensive sectors (Healthcare, Communications, Utilities and Staples) underperformed, as investors decided to rotate back into Technology and Industrials (primarily electrification/data center beneficiaries). Consumer Discretionary also performed well , as autos and luxury continued to catch a bid.

The bond market was weak, driven be the situation in Japan. The good jobless claims in the US also made traders wanting to sell the market. The US 10yr yield rose to 4.15% and the German equivalent is trading closer to 2.80% again, the highest level since late March. Just note that this yield was at 2.35% at the end of last year, which means a 45bp move higher approximately. In terms of prices this translates to about -3%.

Precious metals had a volatile week, after an attempt to break higher. Gold lost again the 4200$ level, while Platinum approached with conviction the 1700$ level again only to finish the week at 1640$. Silver registered a new record high, north of 58$. The start of the week brings metals attempting to move higher again.

The dollar traded in tight ranges, against more currencies, except for the yen. The EURUSD is trading back closer to 1.1700, after paying a visit to 1.1500 a few weeks ago, while the EURCHF is creeping higher towards 0.9400, as the market seems convinced that the SNB will intervene to weaken the Swiss currency.

Chart of the week:

Some mid-term election years have been unfriendly to investors.

The above chart shows the performance of the S&P500 during mid-term election years, in this century. These elections take place two years after the Presidential elections and could lead to significant changes in the Congress. The electorate will vote again for all the 435 seats of the House and for about one third of the Senate. Hence, it has been common in the past, that the control of the House or the Senate or both change hands. Looking at the chart we see that 50% of the observations have produced a negative performance, of which two instances produced a 20% drop. Also the last two mid-term election years were negative ! Statistical correlation does not imply causation of course, which means that the market would have fallen anyway and the correction was not the by-product of the mid-term elections. But as with all patterns, investors and traders will have this at their back on their mind and could be more nervous during corrections.

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : KSH / FactSet,