The US 10-year yield reached 5.35% yesterday, as the S&P500 traded just shy of an all-time high. Even the equal-weighted version rose, suggesting that the rally was not driven solely by technology stocks.

Meanwhile, the Nasdaq advanced to a fresh record high, despite the latest warning from SoftBank’s Masayoshi Son—who is a firm tech believer! He warned that superintelligence in the wrong hands could become ‘super dangerous’, joining other leaders who, in recent weeks, have called for slowing the development of their most powerful models.

Alas, AI companies are stuck with debt and liabilities, and cannot slow down much. And the data show that AI demand remains robust. Hon Hai Precision—a supplier to Nvidia and Apple—announced better-than-expected quarterly revenue yesterday. The news offered further confirmation that the AI buildout is growing fast enough to help shield related companies and industries from rising yields. How high yields must rise to challenge growth remains to be seen. For now, US technology stocks seem unworried.

They could perhaps absorb another 50–100bp rise in yields, but of course, the higher borrowing costs move, the greater the pressure on their profitability outlook. For now, the growth outlook remains the major driver, but there will surely be a tipping point when investors say, ‘OK—we’re moving into bonds.’ Especially if the rise in bond yields is mainly driven by real yields, while long-term inflation expectations remain relatively well anchored.

The feeling is different in Europe. Rising yields due to elevated inflation, and widening spreads between Germany and other European countries due to debt worries, are weighing on European stock markets. The Stoxx 600 was slightly up yesterday, but the index has retreated around 5% since its summer peak.

Limited technology exposure and the more cyclical nature of European stocks make them more vulnerable to rising borrowing costs than their US peers, which are better positioned to absorb higher borrowing costs thanks to robust AI-backed growth. I expect European stocks to underperform their US and other technology-heavy global peers as yields rise.

Japanese repatriation risks

Looking deeper, the French-German 10-year spread narrowed to 136bp yesterday, from above 150bp last week. The good news is that France raised €6.7 billion at yesterday’s Treasury bill auction, borrowing for around three, four, six and twelve months. The auction went smoothly, but longer-term funding remains expensive: at last week’s auction, France paid almost 5% to borrow for ten years.

So yes, France can still find buyers, but they are demanding a higher return. And the headache is far from over: France still needs to convince investors that it can rein in its growing deficit, while next year’s elections could undo whatever is agreed now. Far-left and far-right candidates are among the main favourites, and neither camp looks likely to prioritise budget discipline. Alas, the market may force their hand. And Europe’s bond troubles could have consequences well beyond Europe.

A Tokyo-based global bond fund managed by Sumitomo Mitsui DS reportedly sold its entire French government bond position over fiscal concerns, shifting the money mostly into German Bunds, but also into short-term Japanese government debt.

Now, the part that interests me is what happens if more Japanese investors decide to bring their money home. Japanese investors reportedly hold around ¥25 trillion (€141bn) in French debt. So there is a sizeable pool of capital whose direction matters.

And rising Japanese yields are already increasing the risk of capital repatriation and a further yen carry unwind. Remember, we were discussing that risk when the Japanese 10-year yield reached around 1.75%. That was never an automatic trigger, but a level at which domestic bonds were becoming attractive enough to encourage money to return home. We are now well above it—near 3.10% today.

Now, the reason we have not seen a massive unwind due to rising Japanese yields is perhaps that ample global liquidity has helped cushion the adjustment, while AI investment has kept the growth outlook encouraging. Investors have also been reluctant to buy Japanese bonds while yields are still rising: nobody wants to buy today what could become cheaper tomorrow!

But France’s fiscal and political troubles add another reason for big Japanese investors to reconsider their overseas exposure. They now have not only a more attractive alternative at home, but also growing concerns about what they own abroad. And higher yields elsewhere may not be enough to compensate for that loss of confidence.

So if Japanese investors start moving capital back home, fund repatriation could support the yen, particularly where overseas holdings are unhedged. And a stronger yen would squeeze investors who borrowed in yen to buy higher-yielding assets elsewhere. Closing those positions means selling assets and buying back yen, potentially reinforcing the move. As such, a new episode of yen carry unwind could pull the rug from under global risk assets—even technology stocks could be hit.

And the longer-term implication also matters for bonds. German Bunds may benefit initially from investors leaving France. But if Japanese investors increasingly favour domestic debt, both Bunds and US Treasuries could face less buying over time. That would help keep their yields in a higher regime.