Financial Planning / The Compound Effect
Japan Yields and the Private Credit Question
| 3 min | By Heath J. Harris
Japanese government bond yields just hit levels not seen in 17 years. Here's why that matters for your portfolio, even if you own zero Japanese bonds.
Most people I talk to can't name Japan's prime minister, and I don't blame them. What's happening in Japan feels like somebody else's problem. It isn't.
The 10-year Japanese government bond — JGB, for short — just crossed 1.7%. That's the highest it's been since 2008. For a country that spent twenty years at zero, that's a tectonic shift. And Japan matters more than most Americans realize, because Japan has been the single largest foreign lender to the United States for most of the last two decades.
When JGB yields were 0%, Japanese pension funds and insurance companies had to go somewhere to earn a return. They bought U.S. Treasuries. They bought U.S. corporate bonds. They bought U.S. private credit. They bought commercial real estate debt. Hundreds of billions of dollars flowed from Tokyo into every corner of the American credit market, and it helped keep our borrowing costs low for a long time.
That trade is now unwinding.
Why it matters for you
A Japanese pension fund that can earn 1.7% at home, in its own currency, with no exchange-rate risk, doesn't need to reach for U.S. bonds yielding 4%. The math flipped. Over the next few years, we're likely to see a slow repatriation of Japanese capital — meaning less foreign demand for U.S. debt, which puts upward pressure on our own yields.
The market hasn't fully priced this in. Most retail investors haven't even heard the story.
Here's the part that actually affects your portfolio: private credit.
Private credit has been the darling asset class for five years running. Every major wirehouse is pushing it. Every advisor conference has a private credit breakout session. Yield-hungry retirees have been sold on 9-11% "uncorrelated" returns that supposedly sit safely outside the stock market.
A lot of that demand was fueled by cheap capital sloshing around the global system. Japanese institutions were quiet but meaningful participants. As that capital goes home, private credit funds will have to raise borrowing costs to attract replacement money. That eats into the returns LPs were promised. It also means the "9-11% yield" some investors are counting on may compress — exactly at the moment their advisor has locked them into a seven-year commitment with limited liquidity.
What I'm watching
Three things:
First, private credit default rates. They've been conspicuously low for an asset class of this size, during a tightening cycle, which doesn't add up. When rates stay high for longer, weak borrowers eventually break. I want to see how these funds mark their books when that happens.
Second, liquidity terms. A lot of private credit was sold to individual investors through "interval funds" that promise quarterly or annual liquidity. Those terms are contractual. They're also under-tested. If enough people try to exit at the same time, the funds can gate redemptions — meaning your money is stuck until the fund says otherwise.
Third, overall allocations. If you have more than 10-15% of your portfolio in private credit, you're taking concentration risk people aren't talking about. Diversification inside the asset class isn't the same as diversification across asset classes.
The practical point
I'm not saying private credit is bad. I own some of it myself. I am saying the macro backdrop that made private credit extraordinary is quietly changing, and very few people are changing their allocation to match.
If your portfolio has private credit in it — especially if it was sold to you in the last three years — it's worth a hard look. Not a panic look. A hard one. What's the actual yield net of fees? What are the liquidity terms? What percentage of your net worth is in this single asset class? What happens if the fund suspends redemptions for a quarter?
These are planning questions, not trading questions. And planning questions are easier to answer when the news isn't screaming at you.
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— Heath