Global bond funds have for decades been attracted – and repeatedly burned – by a trade known in Japan as the ‘widow-maker.’
The idea is simple: borrow and sell Japanese government bonds in expectation of tumbling prices, before buying them back and pocketing the difference. That strategy racked up losses for debt investors during the country’s long years of ultra-loose monetary policy. Now, it has become one of the most lucrative bets in the global bond market.
Japanese bonds have lost more than 4 per cent in 2025 in total return terms that exclude currency swings, making them by far the worst performer in the world’s government bond markets, according to Bloomberg calculations. The market has been roiled by on-again, off-again bets on interest rate hikes, and fears that the country’s next prime minister will unleash a spending blitz that could push up long-term yields.
“Forget Treasuries or gilts, one of the cleanest plays is to sell JGBs,” said Jupiter Asset Management money manager Mark Nash of short bets on bonds. “The widow-maker trade has been one of the most profitable relative to other markets.”
Japan’s 30-year bond yields hit an all-time high this month. An S&P gauge of futures linked to the bonds has dropped around 2 per cent in 2025. The selloff has become so bad that Goldman Sachs Group has labelled Japan “a net exporter of bearish shocks” in the global debt market.
There are a few key rationales behind the trade. Japan’s core inflation has been above the central bank’s 2 per cent target for almost all of the past three years. Interest rates, despite a series of hikes that started last year, remain exceptionally low in global terms. The trade has also been fuelled by broad worries over fiscal policy, which have weighed on bonds from New York to London in 2025.
Mr Hiroyuki Kimura, portfolio manager at the more than US$230 billion (S$298 billion) Western Asset Management, said his fund has been short duration in Japan’s bond market for a prolonged period and plans to stick to that strategy. The trade is mainly being executed through a large short position in five-year bonds, he said.
RBC BlueBay Asset Management, which tussled with bond bulls during previous bets on the widow-maker, recently positioned for a decline in Japan’s 10-year bond prices and is now short duration in the country, said Mr Mark Dowding, its chief investment officer for fixed income, in a note on Oct 10. He still sees value in long-dated yields.
There are risks to the trade. Local life insurers may return at year-end, boosting demand, while improving finances offer some room for the government to reduce issuance in the next fiscal year. US interest rate cuts could offer further support, since Japanese bonds are historically correlated with Treasuries.
But right now, many bond funds remain convinced that Japan’s widow-maker trade will continue to be a rainmaker.
A key question for traders is what sort of impact Japan’s next prime minister has on the country’s US$7.7 trillion debt market.
Ms Sanae Takaichi, who recently won the leadership vote in the ruling Liberal Democratic Party, has promised cash hand-outs and tax cuts, but traders also think her victory will delay rate hikes. That has fuelled fears that longer-term bonds will ultimately take the brunt of the selling pressure, as investors worry that future generations will pay the price of fiscal largess today.
Just days after Ms Takaichi won the leadership vote in the Liberal Democratic Party, the governing coalition collapsed – plunging the country into its biggest political crisis in decades. By Oct 20, she had shored up enough support to agree a new coalition but the risk that political headlines weigh on bonds is far from over.
“We expect there is a deal to be done on fiscal stimulus, although the size of any spending is unclear,” said Ms Lauren van Biljon, senior portfolio manager at Allspring Global Investments UK, before the new coalition was agreed. “It suggests caution is warranted when it comes to duration in Japan. The yield curve is steep but that doesn’t mean it can’t be steeper.”
Some investors are optimistic. Japanese bond yields are attractive on a hedged basis, making them appealing for many foreign investors, said Ms Kathy Jones, chief fixed income strategist at Charles Schwab & Co. The country’s fiscal position looked to be improving leading up to the elections, which boosts the outlook for the nation’s debt, she said.
The bears may also be overstating Ms Takaichi’s ability to unleash large-scale stimulus, given the risk of a revolt by so-called bond vigilantes – who were partly credited with toppling the brief government of former British Prime Minister Liz Truss three years ago.
“If Takaichi is in any doubt, she should ask the UK what happens when you defy the bond markets,” said Mr Alex Everett, a fund manager at Aberdeen.
But the numbers are stark. Japan has the highest government debt-to-GDP ratio in the developed world by a wide margin. Debt auctions, while showing some signs of easing pressure, remain under heavy scrutiny as yields linger at multi-year highs. The yen is also the worst-performing Group-of-10 currency against the dollar over the past six months despite prospects of further BOJ hikes.
“It’s difficult to see anything other than a continuation of this trend during the remainder of the year, particularly following the Takaichi election victory,” Mr Matthew Ryan, head of market strategy at financial services firm Ebury, said of selling Japan bonds. BLOOMBERG