Japan debt crisis: how rising bond yields threaten US markets

0:00Two months ago, I told you that Japan's debt crisis was going to crash your portfolio. Most people ignored me, of course, but guess what just happened? Japan's 30-year bond yield hit the highest level since these bonds were invented, and the US Fed just intervened to prop up the yen. Think about that. The US government is propping up the currency of another country.

0:26If this becomes a new baseline, there will be much more dollar weakness. So this is no longer the "oh, this could happen" anymore. No, this is the "it is happening." And if you don't understand what's going on, your portfolio, your 401k, all that stuff could get hit pretty hard now. So hard that Winston back there is hiding behind the furniture. That is my risk manager Winston, and my name is Felix Prehn. I'm an ex-investment banker.

1:02I also founded the GOAT Academy where we've taught over 20,000 students how markets really work, and also the co-founder of trademission.io where we give you the news and the data that's usually reserved for institutional traders. And in November last year, I made a video warning you about exactly this situation. And I told you Japan's debt crisis would trigger a massive unwind of something called the carry trade. I told you US Treasury yields would spike. I told you your stock portfolio was at risk, and most people fell asleep because it sounded technical, and it is. I'm not going to lie to you. This is not something that we were taught about, right?

1:43But I did tell you, and this is not an "I told you so." This is about what we do right now, how we can profit from this, how we can protect ourselves. But I thought Japanese yields would explode, and the 30-year Japan bond yield has just exploded to the highest level ever. I said US markets would fall, the S&P went down 2%. Over a trillion wiped out. I said the banks would get crushed, JP Morgan's down. And I said this Treasury Secretary, he would panic. He's literally calling Japan, begging them to say things to calm the markets. So much so that the Fed is now stepping in.

2:16So here's what we're going to do in the next 20 minutes. I'm going to explain what's happening right now in Japan, why it matters to your money, and exactly what you need to do to protect yourself before this becomes more serious. Okay, so here's where we stand filming this at the beginning of 2026, but the story will continue throughout the year. Japan has the worst debt crisis of any country on Earth. I mean major country, excluding the tinpot hut type economies. Their GDP debt to GDP ratio is now 250%.

2:54250%. To put that in perspective, the US right now, which is not exactly a poster child of fiscal prudence, is at about 120%. And so basically, if you earned $50,000 a year, it would be like owing $125,000.

3:13And Japan has been paying virtually zero interest on this debt for 30 years. They've been running the world's longest Ponzi scheme. And everybody thought, "Oh, it's the new normal. It's just how Japan operates." But that's changing fast. Rapido. The Bank of Japan raised their interest rates in December to the highest level since 1995.

3:40Now the interest rate is an appallingly small 0.75%. And that's literally the highest rate in 30 years. So they've abandoned their efforts to control interest rates completely, and they have gone from buying bonds to selling bonds. It's all very confusing, but we're going to make it as clear as mud in the next few minutes.

4:06And then we get, and this is where it gets political, which is always what makes things better, right? Prime Minister Takaichi, Japan's Prime Minister Sanae Takaichi, she is pushing for massive spending, and the bond market is like, "Is that a good idea?" We've had a lot of spending already for 30 years and it didn't do anything and you want to spend more. The definition of insanity, isn't it? And she's calling for an election in just a couple of weeks as I'm recording this to get a mandate to spend more.

4:43Now that's a bit like going to turkeys before Halloween and saying, "I'm going to set you all free if you vote for me." They're probably going to say yes, right? They're probably going to vote. It's very much the same with the electorate, the unwashed masses, you and me. If we're asked to vote for someone who's going to give us lots of money, we're usually not going to go, "Yeah, but it could be irresponsible in the long haul." And think about the carry trade and the poor American investors. They don't give a hoot. They just want the money. Tax cuts across the board.

5:14And how are they going to pay for that when they're already drowning in debt? Well, her answer is, "Trust me, I'll manage it without issuing more debt." Now the bond market of course said, "Uh," and here's what happened. Bond yields have gone through the freaking roof. They are rebelling, right? The bond markets have literally gone up since the last video I made by about 10%. Doesn't sound like a lot, but for the really, really dull bond traders, that's just a little bit more than they can handle.

5:48In fact, to put this into perspective, the amount their interest rates have moved on by, and you're still thinking, why should I care? I'll get to that in a second. It's a move that is so unusual that it is meant to happen once in like a 100 million years type thing. It's never ever meant to happen. And when the bond investors panic, and I learned something about that, I was sitting on a trading floor. Two guys to my left was our bond trader, a very smart guy, not the most interesting person in the world, but a very smart guy, nice guy, actually.

6:20So what comes next could determine your financial future for literally the next decade. That's how much this matters. Because you're still sitting there thinking, okay, I don't own any Japanese bonds. It's really far away. Why the heck should I care? Japan owns $1.22 trillion in US debt. That is more than Mexico's entire GDP.

6:51They probably don't account for drugs, do they? That's another topic for another day. We've offended the Mexicans, the sombrero Canadians, as they're known. Okay, it's bigger than Apple, right? They're the single largest foreign holder of US debt. And for the past 30 years, Japanese investors have been buying US debt like crazy. Why? Because it's a Ponzi scheme.

7:14And let me explain that to you. It was free money. It was the glitch in the system. Japan gives you money at 0% borrowing. Cost you zero, nada, to borrow it. You invest in the United States where you believe the government's going to pay you back and you collect 4 to 5%. That's free money, right? Who's ever turned free money away?

7:36Now there is some cost to this. There is some hedging cost to this and managing the currency risk and that sort of thing. So the problem is that the Japanese bonds are no longer 0%. They're now 3.7%. It was 3.9% at one point last week. So why the heck would a Japanese person, a sane Japanese person, put their lovely yen and move it and exchange it to US dollars, which has currency risk, send it to the United States to get an extra 0.1%?

8:26No sane person is going to do that. It doesn't make any sense. So what does it therefore mean? All that money that was being lent to the US for free basically, well, that's not happening anymore. So those Japanese bond holders are going to sell hundreds of billions of dollars, maybe the full $1.22 trillion over time.

8:47So the carry trade, as this is generally known as, it's getting unwound. You're thinking, okay, $1.2 trillion sounds like a lot, but we got $38 trillion debt. We're the biggest country in the world. And yes, you are. Well done, you Americans. But see, hedge funds got involved in this. And hedge funds are like, it's free money. You can make 5% for free. Oh, it sounds lovely, but it's a bit dull. The sort of thing my grandmother used to make. Let's leverage this. It's free money. It's risk-free.

9:23So the estimates, and nobody knows exactly what hedges do, but the estimates is it could be up to $20 trillion in this trade. How do they manage that? Well, they just leveraged it times 20 because that's what you do when you're a hedge fund, and if you fail what's the downside? None, right? We've learned that as bankers. So hedge funds have to close those positions. So they sell the US debt, they buy back yen, and the market crashes.

9:52We saw a preview of that in August, was it 24 or was it 25? I can't remember. But when that happened, what did you see? Bitcoin went down 23%, the NASDAQ went down 10%, the S&P went down 8%. Wasn't fun, was it? Except if you knew what was coming, in which case you can position yourself ahead of it.

10:12And maybe you're still thinking, Felix, I don't know why I'm watching this. I don't make any carry trades. I don't really understand what that is. And yeah, you might be right. But let me explain why this matters to you. This is you, just to make it clear. If you identify as them and theirs, I apologise for that. Maybe I should draw more arms. And you own things like the S&P 500 directly or through your pension fund, right? You own things like Apple. You own things like Meta. You own things like Microsoft. It's almost impossible to not.

10:48Own those stocks if you're a human being with a job. Now, tech stocks are funded by what? Bill Gates, the Almighty. No, no, cheap debt. Your real estate, yes, you have a house you live in. You probably have a mortgage. Well, those rates would go up.

11:06Crypto would think of the edge of the planet because when these hedge funds are forced to sell they don't just sell one thing, they sell everything. They basically get margin called, they have to derisk, they have to survive. And when they sell your assets, my assets, Winston's assets, they go down with it. That's why he's stocking up on bones. So you're exposed whether you know it or not, whether you like it or not. And the scariest part is, according to Bank of America, the money managers control most of the US market, like $175 billion.

11:41Half of them have zero downside protection. They're like airbags, we don't need them. Seat belts, we don't need them, right? Market's always going to go up in a straight line kind of thing. So they are fully long, fully exposed and completely unprepared because everyone's on the same side of the boat. So the boat could be flipping right about now.

12:04Now on top of that, because it gets worse, we have our European commissars, our European friends, the United Socialist Republic of the European Union where free speech is forbidden. Now those guys also own about 40% of foreign-owned treasuries, about $8 trillion US bonds, double actually what China and Japan have combined. Now Europe is broke, right? We all know that they need to massively increase their defence spending because Papa Trump told them, sorry, because of Russia and Joe, all that kind of stuff.

12:43So where do you think they're going to get the money? Well, they could sell the US debt. So the US government is in a tough decision here. Now the US Treasury Secretary says that Europe should spend more on defence, which is obviously very reasonable. If you are close to US defence contractors, you're going to get the money. But what if they fund it by selling US debt which would spike American interest rates which would choke the American economy.

13:10Now speaking of Scott Bessent, the glorious, he was speaking at the World Economic Forum where all the world's charitable people get together and figure out how to make the world a better place and make sure that all the children are cared for. Something along those lines. There's apparently a very large number of young ladies in Davos at present. No one is entirely sure why.

13:37He told Scott Bessent, everybody actually, I quote, he says, "Sit back, take a deep breath, let things play out." He also said, "I've been in touch with my counterpart in Japan. I'm sure they will begin saying the things that will calm markets down." Saying the things, not doing the things, not implementing actually any solutions, not doing something, just talking.

14:03And that's kind of when you know you have no plan. When the Treasury Secretary of the United States is reduced to hoping that Japan will find some reassuring words to calm the market, you kind of know we're in trouble, don't you? The adults are panicking. Apparently some doubt whether all the young ladies seen in Davos are adults, but you better ask Bill about that, either one of the Bills apparently. Okay, we're getting naughty now.

14:32Let me explain something that most people don't understand and your financial adviser might not understand. I'm not a financial adviser, I'm not in any way, shape or form licensed to give financial advice. But there is a thing called a correlation breakdown. In normal times stocks go down, bonds go up. It's kind of how it works. Everybody panics, we go to safety which are bonds.

14:53So your 60/40 portfolio that you probably have whether you like it or not because your pension fund is invested like that. But you see, when the government's credit worthiness is in question, stocks go down, bonds go down with them. So you kind of get demolished.

15:12Now Ken Griffin of Citadel says there's an explicit warning here. Bonds lose what makes them special in a portfolio. Which means when bonds and stocks move together, in his words, in prices, bonds lose a substantial part of what makes them so special in constructing a portfolio. That's the full quote. The translation, your hedge no longer works. It is now 100% risk whether you're in stocks or bonds. Both sides are going to go down and up. Doesn't really help.

15:43Now Michael Purves, stock strategist out there, he said, "If you want to protect yourself against these kind of risks, do it with gold." And that's perhaps one reason why gold's done this. This is the gold chart from Trade Vision here. This is the silver chart. Pretty insane, right?

16:03And it's been good to some of us, but is it going to go up further? Personally, I think so. There's going to be some wobble tilt away, but I personally think so. That doesn't mean you should now put all your money into gold and silver. But what I would suggest you do instead is learn these frameworks because they seem confusing, right? This is probably a bit too in-depth.

16:22But I always say, well, I'd rather explain it to you how it is even if you have to watch it twice because eventually it'll sink in and you will become more skilled at, you'll be better placed to make decisions. And my goal is not to freak you out. That wouldn't be helpful. So therefore I try to tell you the whole story as it actually is rather than dumb it down for a CNBC type audience. No offence to the CNBC type audience.

16:48You know what I'm saying? We've offended. Who have you offended so far? The Mexicans, probably the Canadians, the Bills, I shall mention who, Japanese probably. We've done all right. We haven't managed to get the French in yet. There must be in there somewhere. Well, I did offend a lot of Europe, I suppose. So that's probably okay then. We're equal opportunity offenders over here. Oh yes, and people who identify as, that's not finished that sentence. It's going to get me into hot water.

17:17But when you get the bond king, one of the most respected bond investors in the world, he's called Jeffrey Gundlach, and he says hold 20% in cash, he's never said that before because normally he would be all in bonds, an exciting life we live. I actually don't agree with the cash part. I think cash is definitely going to get decimated this year. But I think moving some of that into gold and silver might not be such a bad idea provided your time horizon's right and you've done your risk management. Make your own decisions, your own research and all that kind of stuff. And you bore in mind that neither Winston nor I are financial advisers. And I might have surprised you about Winston. I get that, he has a smart look there, doesn't he, still hiding behind the furniture. Winston. Winston. Hey, why are you hiding your face? Come on. There we go. That's risk management entering the room. Sit down.

18:06So basically the smart money is saying don't trust anything. Don't trust one of the largest economies in the world. The US is so worried about it they're getting the Fed to step in. And therefore how's this going to turn out? Winston, are you going to tell us? Are you going to tell us? Let's hope he will.

18:24So we're going to wrap it up. Let me give you an action plan. The sectors I'm actually looking at right now. And let me also throw in something extra. So I actually recorded a very short master class for you where I break down the actual ways that I learned Wall Street invests, how they pick the sectors, how they pick the stocks, and how they do the timing. And by timing I don't mean buy the bottom and sell the top. That doesn't happen, but trying to be smarter than average. And there is a structure to it. There is a pattern to it. There's a system to it. It's been around for 50 years plus. If you want to learn that, you can learn that for free. It's a short video. You can go to felixfrs.org/getfree. Links down below in the description and you can watch that video and you can learn that yourself.

19:12In addition to the general FOMO fear around here, Japan, but I would look at where is my portfolio sitting right now. I would watch the 10-year bond yield. I know it sounds terribly boring, but it's important. And I would look at what part of my portfolio is in defensive stocks. I wouldn't really do the cash thing necessarily because that's going to lose money. I would look at gold and silver allocation. And I would rebalance very much towards quality companies because we're in a phase where the value investors look like idiots. And that's usually just before they start to look really, really smart. Just go back into the COVID era boom and you know what I'm talking about.

19:54And here are some of the sectors that I'm looking at. I'm not telling you to buy these. This isn't financial advice. I'm just saying defensive positioning generally includes energy things, things like XOM, CVX, two of the largest oil companies out there, materials, gold. So there's gold, SLV, silver, quality tech. And the beautiful thing is a lot of the quality tech did not have a good year in 2025, which in my humble opinion means it's more likely they'll have a good year 2026. That isn't guaranteed of course, but Microsoft, Apple, Meta, Google, they will still be here. They will be able to raise prices. And continue consumer staples. Some of these stocks I own as well, things like Coca-Cola, Procter and Gamble, Walmart, those kind of reliable companies who've survived.

20:41Do we want to avoid? Which stocks are haram? No, no, that's a whole another ecosystem there that we've probably offended. No, some good stuff in that as well. So, banks, yes, regional banks, financials, they could get hit from bond losses. High debt companies, and I used to make a zombie list of companies and publish that for you. If you want me to make that list again, put zombie in the chat down below, and the algorithm will go, "What is this video about? Why are they talking about zombies?"

21:13Discretionary consumer stock, so your traditional retail, your luxury goods. These are the kind of things people stop spending money on, right? That's something to think about. And then there is speculative tech. If you're concerned about that, think about these.

21:28Now, I'm not saying we should go all out of tech. I love tech. I think there is a lot of government spending in the US. A lot of money printing is happening and AI is going to drive a lot of the tech stocks higher. But you want to be wary of the downside and the risk. You want that risk to be managed, not unmanageable.

21:47And real estate, it's a double-edged sword. Why? Because interest rates are going to fall from the government. But at the same time, mortgage rates could actually go up. How on earth is that possible? Because the market sets the rates, not the government. That's the concern.

22:04That's why I said to you, watch out for the 10-year Treasury yield because that'll tell you that. And I've got a few more key levels for you to watch here. These are things that I would watch. Let's take a screenshot, write them down. The US 10-year above 4.5%, the US 30-year above 5%. Those are danger signals.

22:27And the dollar yen exchange rate, that's also something to definitely keep an eye on. We don't want that getting out of hand. If it does, Papa Trump's going to have to have a tough word with the Japanese and say, "You shall do as I think." Which may happen to be honest. It may well happen.

22:44And that's possibly why the crisis might not pan out as it should on paper because the Japanese government will do a 180 and reverse because the US will tell it to because Japan has a significant problem. The US catches the cold and you know what happens when everybody catches the cold? Well, everybody has to wear masks. Remember that?

23:07Apparently, that wasn't a cold. No, that was a virus that could kill you in an instant except when you were eating. Remember that? We had to wear masks. It was compulsory. But when we went into restaurants, we could take them off and we could eat because apparently you couldn't spread it while you were eating. I mean, there was some crazy stuff going on there, wasn't there?

23:25But honestly for you, knowledge is power. Be prepared. Don't be panicked. Don't be fooled. And when I say act now, I don't mean panic and freak the heck out. I mean learn to manage your money better. Maybe you say, "I haven't got time for that." Well, if you spend 8 hours a day or more earning it, I say you have the time for it because the whole point of you going to work is to earn the money.

23:50So, the money deserves a little bit of love and attention and it's saying, "Please, please strip me." So if you want to learn some more, check out the master class I made for you at phoenix.org/getfree. If you got some value out of this or just the occasional chuckle, forward it to a friend or a golden retriever.

24:08And Winston says, "This used to work." Winston, come on, sit up. There he is. He's a good boy. He says, "Thank you for watching and we wish you a glorious, happy, and safe 2026." If you're sitting on some cash right now or the same old stocks that you've been buying for years, what's about to happen in 2026 is going to make that worth a lot less. But if you want