~How to think about choosing products with similar interest rates~
Introduction📖
Perhaps due to the encouragement of Finance Minister Katayama, I feel that the presence of individual government bonds has increased compared to before. It seems there is also discussion about adding them to the NISA target in the future.
As I mentioned in my previous article on individual government bonds, I have been a user of this product since its very first issuance. Among so-called principal-protected financial products, I believe it possesses a very superior product design that far surpasses those in the private sector.
This time, I would like to focus on more specific product selection.
💡The mystery of similar interest rates
First, the current lineup of individual government bonds consists of three types: “Fixed 3-Year,” “Fixed 5-Year,” and “Floating 10-Year,” and the interest rates (before tax) for the October 2026 offering are as follows.
The interest rate for the Floating 10-Year, which has the longest term, is lower than that of the Fixed 3-Year, which has the shortest term. Usually, government bond yields tend to be higher the longer the term. Why does this happen?
This is because the way interest rates are determined differs among the three types of individual government bonds.
In other words, even if 10-year interest rates exceed 3-year and 5-year interest rates in the regular government bond market, that relationship can be reversed in the offering rates for individual government bonds.
And when the three types of interest rates are close, as they are this time, another question arises.
“If the interest rates don’t change that much, what should I use as a criterion for choosing?”
If you simply compare the interest rates, the Fixed 5-Year is the highest. However, if interest rates rise further in the future, the Floating 10-Year, whose applicable interest rate is reviewed every six months, may become more advantageous. Conversely, if interest rates fall, the Fixed 5-Year, which can secure the current interest rate, becomes more attractive. Furthermore, individual government bonds have the feature that they can generally be redeemed early after one year has passed since issuance. If interest rates rise, one could consider the option of redeeming early and switching to new government bonds. However, early redemption incurs a predetermined interest adjustment amount. In other words, even if the current interest rates are similar, the future investment results will not necessarily be the same. Therefore, this time, I would like to think about the rationality of choosing each of the three types of individual
government bonds
based on the interest rate mechanism, future interest rate trends, and conditions for early redemption.
💡Entering a phase of global interest rate hikes
Here, I will also touch a little on recent movements in the government bond market.
The three graphs above show the trends in 2-year, 5-year, and 10-year Japanese government bond yields over the past five years.
All of them have risen significantly from the ultra-low interest rates around 2021, and as of October 9, 2026, the 2-year bond has reached 1.91%, the 5-year bond 2.34%, and the 10-year bond 3.02%. However, such interest rate hikes are not a phenomenon unique to Japan.
Globally, the prolonged inflation, fiscal deficits in various countries and the increase in government bond issuance, and massive investments related to AI are being recognized as factors pushing up interest rates. The possibility that long-term interest rates will remain at a high level is being discussed, with the addition of rising energy prices due to the situation in the Middle East.
Of course, it is not guaranteed that interest rates will continue to rise in the future. There is a possibility that interest rates will fall due to an economic slowdown or the cooling of inflation.
However, at the very least, we are no longer in an era where we can think about asset management with the assumption of ultra-low interest rates like before.
That is precisely why we must decide whether to fix and secure current interest rates or choose floating interest rates that can respond to future interest rate changes. That judgment is more meaningful than ever.
Therefore, I will specifically compare the three types of individual government bonds.
💡Differences between the three types and future interest rate response
From here on, I will organize the characteristics of each.
In this offering rate, the Fixed 5-Year is the highest. However, you cannot determine superiority or inferiority based solely on the current interest rate.
This is because the biggest difference between the three types lies in how the interest received changes if interest rates rise or fall in the future.
👉Fixed 3-Year: You can review your investment after 3 years
For the Fixed 3-Year, the interest rate at the time of purchase does not change until maturity.
For the October 2026 offering, you can secure an interest rate of 2.07% per year for 3 years. After 3 years, the principal will be redeemed, and you will choose a new investment destination according to the interest rate environment at that time.
If future interest rates have risen, there is a possibility that you can reinvest at a higher interest rate. On the other hand, if interest rates have fallen, you may be forced to invest at a lower interest rate than now.
While the Fixed 3-Year allows you to segment your fund management over a relatively short period, the period for which you can secure the current interest rate is also short.
👉Fixed 5-Year: Secure the current interest rate for 5 years
The interest rate for the Fixed 5-Year is 2.39%. It is the highest among the three types.
Even if government bond market interest rates fall in the future, the interest rate at the time of purchase will not change for 5 years.
For those who find the current interest rate level attractive, this is a major merit. But conversely, what if interest rates rise?
For example, even if the interest rate for a newly issued Fixed 5-Year bond rises to 3% the following year, the purchased government bond will remain at 2.39%. It does not mean the principal will decrease, but you will miss the opportunity to have invested at a higher interest rate.
In other words, while the Fixed 5-Year is strong against interest rate declines, there is a possibility of opportunity loss when interest rates rise.
Securing the current interest rate for 5 years comes with the possibility of missing out on future interest rate hikes in exchange for peace of mind.
👉Floating 10-Year: Respond to future interest rate hikes
The Floating 10-Year has a very different character from the Fixed 3-Year and Fixed 5-Year. Even though the 10-year maturity is the same, the interest rate is reviewed every six months.
The benchmark is the auction yield of 10-year fixed-rate government bonds, and the applicable interest rate is determined by multiplying this by 0.66.
For example, if the benchmark interest rate is 3%, it is 1.98%, and if it becomes 4%, it becomes 2.64%. If long-term interest rates continue to rise in the future, there is a possibility that the interest received will increase accordingly.
On the other hand, if interest rates fall, the interest received will also decrease. However, it is characteristic that a lower limit of 0.05% per year is set for the applicable interest rate.
What is important here is that what the Floating 10-Year directly links to is not the Bank of Japan’s policy interest rate, but the 10-year government bond interest rate is the point.
Long-term interest rates reflect various factors, including future policy interest rate outlooks, inflation expectations, economic growth, fiscal conditions, and additional interest rates required by investors.
Therefore, even if the Bank of Japan keeps the policy interest rate unchanged, if long-term interest rates rise, it is quite possible that the applicable interest rate for the Floating 10-Year will rise. It is necessary to fully understand that the Floating 10-Year is a product that accepts changes in future long-term interest rates rather than fixing the current interest rate.
💡Simulation of 1 million yen investment
Let’s compare using actual amounts.
If you invest 1 million yen in each product, the annual interest based on the current offering rates would be as follows.
At a glance, the difference between the 5-year fixed and 10-year floating is 3,400 yen per year. After tax, it is about 2,710 yen. For a 1 million yen investment, that is a difference of only about 226 yen per month.
However, it is premature to judge that the 5-year fixed is more advantageous based on this figure alone.
The interest received on the 5-year fixed remains unchanged for five years, whereas the interest on the 10-year floating changes every six months.
💡 Cases where interest rates rise, remain flat, or fall
Here, let’s compare the 5-year fixed and 10-year floating.
First, if you purchase 1 million yen of the 5-year fixed and hold it until maturity, the total pre-tax interest over five years will be 119,500 yen. For the 10-year floating, the result depends on future applicable rates.
Assuming the first year is 2.05%, and for the subsequent four years, we assume the following three cases.
In the case where interest rates rise, the interest on the 10-year floating exceeds that of the 5-year fixed. On the other hand, in cases where interest rates remain flat or fall, the 5-year fixed yields more interest.
In other words, even if the current interest rate difference is only 0.34 percentage points, a significant difference in the total interest over five years can arise depending on future interest rates. However, the comparison so far is only regarding received interest.
While the 5-year fixed matures in five years, the 10-year floating matures in ten years. If you cash out and end your investment after five years, you need to consider the “mid-term redemption adjustment amount”. Also, to compare the 3-year fixed over the same five-year period, you must also add the condition of what interest rate you would reinvest at after maturity.
Therefore, let’s next consider the “mid-term redemption system” unique to individual government bonds.
💡 If interest rates rise, should you switch?
Individual government bonds have features that differ significantly from government bonds traded in the regular market.
In principle, after one year has passed since issuance, you can request a mid-term redemption from the government. Moreover, the face value principal is refunded as is.
However, it cannot be redeemed unconditionally for free.
At the time of mid-term redemption, in principle, an amount equivalent to the after-tax interest for the two most recent interest payments is deducted. In other words, you will effectively bear about one year’s worth of after-tax interest.
Here, the following question arises:
“If interest rates rise, wouldn’t it be more profitable to pay that adjustment amount and switch to a new government bond?”
For example, consider a case where one year after purchasing a 5-year fixed bond with a 2.39% rate, the rate for a newly issued 5-year fixed bond rises to 3.00%.
With a new bond, you could receive 6,100 yen (pre-tax) more per year per 1 million yen. However, to switch, a mid-term redemption adjustment amount is required.
How long would you actually need to hold it to recover that cost? Furthermore, if you switch, a new five-year investment period begins, so the investment duration will also differ from holding the original bond until maturity. Only by comparing these under the same conditions can you determine whether you should switch.
With individual government bonds, you need to think not only about comparing the rates at the time of purchase but also about how to act when interest rates change in the future.
💡 Verification 🧪
Let’s verify with specific numbers.
This time, we assume you purchased 1 million yen of a 5-year fixed bond with a 2.39% rate, and one year later, the rate for a newly issued 5-year fixed bond rose to 3.00%.
There are two possible options here.
(Option A) Hold the purchased 5-year fixed (2.39%) until maturity.
(Option B) Mid-term redemption after one year → Switch to 5-year fixed (3.00%).
If you simply compare the rates, B looks more advantageous. However, in reality, a mid-term redemption adjustment amount occurs. Furthermore, if you switch to a new 5-year fixed, a new five-year investment period begins from that point.
Therefore, this time we will compare under the condition that the investment ends five years after the initial purchase.
(Option A) Hold until maturity as is
The rate for the 5-year fixed is 2.39%. If you hold 1 million yen for five years, the total pre-tax interest is 119,500 yen, and after tax, it is about 95,224 yen. Even if interest rates rise during that time, the interest you receive does not change.
( Option B) Switch to a 3.00% 5-year fixed after one year
First, you perform a mid-term redemption one year after purchase. At this point, the after-tax interest received for one year is about 19,045 yen, but at the time of mid-term redemption, an adjustment amount equivalent to that same amount is, in principle, deducted. Therefore, the interest income for this one year is effectively almost zero.
Next, you invest the 1 million yen face value in a new 5-year fixed (3.00%). The remaining investment period until five years after the initial purchase date is four years. The interest received during these four years is 120,000 yen pre-tax.
However, what must not be forgotten here is that the new 5-year fixed has not yet reached maturity. To cash out five years after the initial purchase, you must perform another mid-term redemption.
At that time, in principle, an amount equivalent to the after-tax interest for the two most recent interest payments is deducted. If the rate is 3.00%, the adjustment amount is about 23,906 yen.
Considering these, the conditions this time result in the following.
Looking at this, it seems like a surprising result.
Even though the rate of the new government bond became 0.61 percentage points higher, the actual profit after five years is about 23,500 yen higher if you do not switch. Of course, this is the case if you end the investment five years after the initial purchase.
If you hold the new government bond for another year to reach maturity, the second mid-term redemption adjustment amount becomes unnecessary. However, in that case, the total investment period becomes six years, so it is no longer a comparison of the same five-year period.
Regarding this point, whether switching is advantageous or disadvantageous depends not only on future rates but also on when you recover your funds.
💡 At what percentage rate increase does it become profitable?
Using the same conditions as before, I would like to change only the rate of the new 5-year fixed.
When ending the investment five years after the initial purchase, the interest effectively remaining in hand from the new 5-year fixed is roughly three years’ worth, calculated by subtracting the final mid-term redemption adjustment amount (about one year’s worth of interest) from the four years of interest.
For this to equal the five years of interest from holding the old 5-year fixed until maturity, the following relationship is required:
“New rate × 3 years = 2.39% × 5 years”
Calculating this, the required new rate is about 3.98%. In other words, under these conditions, the profit or loss of switching only becomes roughly equal when the newly issued 5-year fixed rises to about 4.0%.
However, this is a calculation based on fixed conditions for the timing of mid-term redemption, the maturity of the next product, taxes, etc., and is not a standard applicable to all switches.
It means you need to think about it including the adjustment amount and investment period, rather than making a simple judgment to switch just because interest rates have risen.
💡 From what perspective should you choose between the three types?
As we have seen so far, individual government bonds cannot be judged solely by their current interest rates.
In addition to future interest rate trends, a rational choice depends on when you plan to use the funds and whether there is a possibility that you might change your investment strategy along the way.
👉The rationale for choosing a 3-year fixed rate
If you plan to use the funds in about three years or want to review your investment destination at a relatively early stage, a 3-year fixed rate is an option. However, when compared to a 5-year fixed rate, the reinvestment interest rate after maturity becomes important.
For example, let’s assume you invest 1 million yen for 3 years at a 3-year fixed rate of 2.07%, and then reinvest it for the remaining 2 years.
The pre-tax interest for the first 3 years would be 62,100 yen.
To catch up with the 119,500 yen interest from a 5-year fixed rate of 2.39% over 5 years, you would need to receive 57,400 yen in the remaining 2 years.
In other words, if the interest rate for the reinvestment destination is 2.87% per year or higher, the total interest over 5 years would be equal to that of the 5-year fixed rate (※This is a simple calculation assuming the 1 million yen principal at maturity is reinvested and the interest received is not reinvested).
While a 3-year fixed rate has room to become advantageous due to future interest rate hikes, there is also a possibility that reinvestment conditions could worsen if interest rates fall.
👉The rationale for choosing a 5-year fixed rate
If you want to secure the current interest rate for a long period, a 5-year fixed rate is a strong option. In particular, if you prioritize the possibility that future interest rate hikes will be limited or that interest rates will fall, the value of being able to secure the 2.39% rate at the time of purchase for 5 years is significant.
Also, if you plan to hold it for 5 years from the start, you can reach maturity without bearing the cost of the mid-term redemption adjustment.
However, if interest rates rise further, you may miss the opportunity to invest at a higher rate.
👉The rationale for choosing a 10-year variable rate
If you believe that long-term interest rates will continue to rise, there is a rationale for considering the 10-year variable rate. Since the interest rate is reviewed every six months, future increases in long-term interest rates will be reflected in the interest received. On the other hand, if interest rates fall, the interest received will also decrease, so it is not suitable if you want to secure the current interest rate for a long period.
Also, note that it has a 10-year maturity. If you plan to end your investment in about 5 years, you need to compare it including the mid-term redemption adjustment.
From the above perspectives, we have compared the three types of individual government bonds, but there is no conclusion that any one of them is absolutely advantageous.
Do you prioritize future interest rate hikes, or do you want to secure current interest rates? Or do you prioritize the timing of when you will use the funds?
The rational choice changes depending on that judgment.
Also, you do not necessarily have to narrow it down to one product. Methods such as combining fixed and variable interest rates or diversifying the timing of purchases are also conceivable. Precisely because the interest rates are similar, you need to pay attention to differences other than the interest rate.
Finally, what would I, the author, choose?
Up to this point, I have compared the three types of individual government bonds regarding their interest rate mechanisms and mid-term redemption conditions, but finally, I would like to add my own perspective on the future of Japanese interest rates.
First, considering the global interest rate environment, there are no signs that long-term interest rates will fall. This is because there are far more factors pushing yields upward.
In addition to the increase in fiscal deficits and government bond issuance in various countries due to persistent inflationary pressure, and this is something being said globally, I see the massive funding demand associated with the development of social infrastructure related to AI, which has the momentum to surpass the industrial revolution of the past, as a factor that will push up long-term interest rates beyond its productivity for the next few years or even longer. I view this as a factor.
Moreover, in the Japanese government bond market, the rise in long-term and ultra-long-term interest rates has become more prominent than in short-term rates. Against the backdrop of concerns about fiscal conditions and government bond supply and demand, a bear steepening led by the long-term zone has also occurred. I am concerned about this becoming entrenched.
On the other hand, when looking at Japan’s economic situation, Japan’s potential growth rate remains low. According to the recent Bank of Japan and IMF, Japan’s medium-term potential growth rate is estimated to be only about 0.6%, so the issue of how much the economy can withstand high interest rates cannot be ignored.
However, on the other hand, the Bank of Japan’s monetary policy is clearly at a turning point. It has become important not only to push the inflation rate up to 2% as before, but also to stabilize it sustainably around 2%.
If inflationary pressure remains persistent and wage increases continue, there is a strong possibility that the Bank of Japan will proceed with additional interest rate hikes.
However, the room to raise the policy interest rate and how far long-term interest rates will rise are separate issues.
Regarding future Japanese interest rates, I am placing importance on the possibility that relatively high levels will continue while repeating upward and downward movements rather than rising in a straight line.
Of course, a development where interest rates fall due to an economic slowdown or the cooling of inflation is also fully conceivable.
And these outlooks lead directly to the choice of individual government bonds. If you think that long-term interest rates will continue to rise in the future, I believe that the “10-year variable rate has the appeal of being able to expect future interest increases.”
Please also refer to the following👇
(Articles related to individual government bonds)
(Articles related to Bank of Japan interest rate hikes)
Thank you for reading.🙇♀️