Japan's government bond yields have surged to their highest levels in decades, prompting some analysts to speculate that this may be behind the cryptocurrency market sell-off on Sunday.

According to MarketWatch, Japan's 10-year government bond yield reached 1.86% on Monday, the highest since April 2008.

Over the past 12 months, Japan's 10-year bond yield has nearly doubled. The 2-year government bond yield also hit 1% for the first time since 2008.

While 1.86% is not considered a high yield for government bonds, its significance is substantial as it marks a turning point: Japan has been in an extremely low interest rate environment for decades, with rates mostly negative or close to zero, and the bond market has been very stable.

This has led global institutional investors to borrow yen at low rates to buy higher-yielding, riskier assets, a strategy known as "yen carry trade."

"Trillions of yen borrowed are being directed towards U.S. Treasuries, European bonds, emerging market debt, and various risk assets," explained economic author Shanaka Anslem Perera, adding, "This anchor is breaking."

Perera noted that Japanese institutions hold about $1.1 trillion in U.S. Treasuries, making it the largest overseas holding.

For the U.S., the timing couldn't be worse, as it coincides with the Federal Reserve ending quantitative tightening, while the U.S. Treasury needs record issuances to cover a $1.8 trillion deficit, he pointed out.

This could impact the cryptocurrency market in various ways. Bitcoin and cryptocurrencies typically perform strongly during periods of global ultra-loose monetary policy and low interest rates.

When Japan provides a large amount of cheap funding through carry trades, some of that capital flows into higher-risk assets like cryptocurrencies and U.S. tech stocks.

If this liquidity flows back to Japan, the speculative capital available in the cryptocurrency market will decrease.

"Cryptocurrencies are usually the first to reflect all of this. They sit at the high end of the risk spectrum, so even a slight change in liquidity can trigger severe volatility," said DeFi market analyst "Wukong."

If there is a severe repricing in the global bond market, investors typically rush to safe havens first, resulting in a sell-off of all risk assets as people scramble to hold cash and liquidity.

Related: Tether CEO slams S&P rating agencies and influencers spreading panic about Tether (USDT)

Original article: “Japan's Bond Yields Rise, Potentially Shaking Global Carry Trade and Cryptocurrency”

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