[TOKYO] Japan’s auction of 30-year sovereign notes on Thursday (Jul 3) is shaping up as a barometer of policymakers’ success in quelling debt-market turmoil that pushed yields on the nation’s super-long bonds to record highs in May.
Yields have stepped down from their peaks, helped by the Ministry of Finance (MOF) adjusting issuance to sell fewer super-long bonds, and by the Bank of Japan (BOJ) slowing its pullback from debt purchases. Recent sales of shorter-maturity securities have also gone smoothly.
But the market remains wary, particularly with 30-year bonds. Yields on these securities in the US, the UK and Germany all moved higher following the May spike in their Japanese counterparts. Demand for this maturity has waned in Japan as traditional buyers such as life insurers trim purchases, and as investors the world over question the long-term ability of governments to manage mounting debt.
“The BOJ and MOF should get some credit for manoeuvring out of a very tricky regime,” said Ansh Gandhi, a fixed-income strategist at Futures First Info Services, adding that recent sales of 10- and 20-year bonds bode well for the 30-year offering.
The auction results are due at 12.35 pm Tokyo time, and the market will be paying keen attention to the bid-to-cover ratio, which measures the level of demand from investors. At the last 30-year bond sale in early June, this ratio was 2.92. Over the past yea,r it has averaged 3.33. Another key metric that will be under the spotlight is the tail, which measures the gap between the average and lowest-accepted prices.
A well-received sale of benchmark 10-year notes on Tuesday brought some support to the market, although traders are still treading carefully.
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“The severe liquidity shortage in the ultra-long-term bond market may have peaked,” said Seiji Maruyama, chief investment officer at PGIM Japan. “We do not expect the kind of turmoil seen after the May auction to recur.”
“While the auction results remain uncertain and there is a possibility of a lacklustre outcome, it is important to note that despite the consistently weak results of recent ultra-long-term bond auctions, the market has not collapsed,” Maruyama said. “This suggests that the supply-demand mismatch is gradually improving.”
Investors have sharpened their focus on longer-term bond yields lately as they question the ability of governments to cover massive budget deficits. In Japan, big local buyers such as life insurers have not filled this gap as the BOJ scales back its huge bond purchases, increasing upward pressure on yields.
The Ministry of Finance has cut bond sale amounts for 20-, 30-, and 40-year debt from this month by a combined 3.2 trillion yen (S$28 billion) to the end of March 2026.
Any signs of a less-than-successful auction on Thursday may require more action from policymakers, Futures First’s Gandhi said, flagging the possibility of verbal intervention or even a rethink on the pace of quantitative tightening by the central bank.
The focus on the government’s fundraising in the bond markets also comes as Japan gears up for a national election this month with costly spending promises being made. Prime Minister Shigeru Ishiba has set pay raises and a one quadrillion yen economy as the top campaign pledges.
“Uncertainty around the upper house election would likely hold back demand” at the auction, said Ken Matsumoto, a macro strategist at Credit Agricole in Tokyo. “Depending on its result, the fiscal policy stance of the government could change drastically.” BLOOMBERG
