A sell-off in Japanese bonds has grabbed investor attention, as worries grow that the country's three-decade high in borrowing costs will reverberate across global markets. The yield on Japan's benchmark 10-year government bond surpassed 3 per cent on Tuesday for the first time since September 1996 -- a landmark for some of the world's most widely traded debt. The move followed weeks of scrutiny of Japan's fiscal and monetary policies, as well as a weakening yen despite a rare bilateral intervention by Tokyo and Washington.

Japan's rising yields are part of a global bond sell-off -- yields move inversely to bond prices -- as investors recalibrate inflation expectations and anticipate more interest rate rises from central banks. The turmoil could also trigger a disorderly unwind of the 'yen carry trade' -- a strategy by which investors have long taken advantage of Japan's low interest rates to borrow cheaply in its currency, in order to buy higher-yielding assets elsewhere. When the BoJ raised its policy interest rate to 0.25 per cent two years ago, extreme market ructions were blamed on the sudden unwinding of the yen carry trade.

Analysts say the build-up of carry trade positions since 2024 is significant, but caution that the trade is hard to quantify and that government intervention in the yen has scared some speculators off. They point to proxies that suggest the trade is back at least to the high levels it was at in 2024. A 'short yen' position, according to Bank of America's most recent survey of global fund managers, remains one of the world's top three favourite trades, keeping consistent downward pressure on the currency.