In the latest ¥2.6 trillion 10-year Japanese government bond (JGB) auction, the bid-to-cover ratio surged significantly to 3.66 from 2.54 last month, far exceeding the average level over the past year. Investors are closely watching Thursday’s 30-year bond auction, which will determine whether the market is prepared for the normalization pains following the Bank of Japan’s exit from its ultra-loose monetary policy.
Against the backdrop of rising global long-term yields, Japan’s 10-year bond auction unexpectedly attracted robust demand, providing temporary relief to the bond market. Tuesday’s auction results showed the bid-to-cover ratio—a key indicator of auction demand—jumped sharply to 3.66, reaching its highest level since April 2024. Following the auction results, Japanese government bond futures rose by 0.20 to 139.22. However, the real test for investors will be the 30-year bond auction in 48 hours, as it will reveal the market’s readiness to endure the normalization challenges post-BoJ policy shift. The yield on this bond recently hit its highest level since its initial issuance. Globally, confidence in long-term bonds remains weak, with investors concerned about massive budget deficits that could exacerbate debt burdens in some of the world’s largest economies. Additionally, the Bank of Japan’s reduction of large-scale bond purchases has led to a sharp steepening of the country’s bond yield curve, heightening worries about government borrowing. Miki Den, senior interest rate strategist at SMBC Nikko Securities, commented: ‘Buying at the 1.5% level is relatively easy; it’s a decent outcome. While this will support the bond market, yields are unlikely to decline rapidly given the upcoming 30-year auction.’ Amid a global confidence crisis in long-term bonds, the pains of normalization are becoming evident. Although the strong demand in Japan’s 10-year bond auction offers temporary respite, it does not deeper structural issues. For years, bond yields have been artificially suppressed by central banks, and now the bond market is undergoing a painful transition toward normal functioning. More critically, the BoJ’s substantial reduction in government bond purchases has caused a sharp steepening of the yield curve, intensifying concerns about the government’s borrowing capacity. The volatility of Japan’s 10-year government bonds has reached a record high. As of this report, the 10-year JGB yield fell by 3.5 basis points to 1.47%. Since last summer, the BoJ has reduced its bond purchases by ¥400 billion ($2.8 billion) per quarter. BoJ Governor Kazuo Ueda, responding to questions in parliament on Tuesday, hinted that the central bank may continue to slow the pace of bond purchases in the next fiscal year.The Bank of Japan will review its bond purchase plan during the policy meeting on June 16-17. After years of ultra-loose interest rate policies by the BOJ, Japan’s bond market is undergoing a painful transition toward normal functioning. The severity of the issue was exposed last month by weak demand at auctions for 20-year and 40-year government bonds, triggering further selling of sovereign bonds.
Former central bank board member Makoto Sakurai stated in a media interview in Tokyo on Monday that the process of reducing government bond purchases by the central bank may halt. Meanwhile, market speculation suggests the Ministry of Finance might adjust its bond issuance plan, following a questionnaire sent to market participants last week seeking opinions on issuance conditions and current market trends. Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management, views this news as potentially alleviating concerns about the spread of ultra-long-term bond issues to 10-year bonds: “The 30-year bond auction scheduled for Thursday won’t clear all uncertainties at once, but this outcome is relatively positive news.” Investors will closely monitor Thursday’s 30-year bond auction. As of the latest update, the yield on this bond reached 2.929%, the highest level since its initial issuance. Risk Warning and Disclaimer: The market carries risks, and investments should be made cautiously. This article does not constitute personal investment advice and does not consider individual users’ specific investment objectives, financial situations, or needs. Users should assess whether any opinions, views, or conclusions in this article align with their particular circumstances. Investment decisions based on this content are made at one’s own responsibility.
