Japanese long bond demand wobbles in auctions

CEIC recently added detailed data on Japanese bond auctions — and their insights shed light on investors' caution about the nation's fiscal and political stresses.

The Aug. 7 auction of 30-year Japanese government bonds (JGBs) saw the average yield reach 3.089% — the highest in decades and a substantial rise from 2.808% in the previous auction a month earlier.

The bid-to-cover ratio — a key measure of demand — slightly declined to 3.43. (To be sure, that was a notably stronger result than the weakness seen in the three auctions in April, May and June.)

This auction took place just days after the historic election loss suffered by Prime Minister Shigeru Ishiba’s ruling coalition, which was followed by a trade deal where Japan agreed to US tariffs. Voters moved toward opposition parties advocating more expansionary fiscal stimulus and less immigration.

The jitters the election caused were even more apparent when even-longer-dated debt (40-year JGBs) was sold on July 23, as our second chart shows. That auction recorded a bid-to-cover ratio of just 2.127 — the weakest since 2011 — reflecting strained investor appetite for super-long maturity debt.

Besides the election, JGBs have seen yields surge partly due to the particularities of the Japanese bond market. The Bank of Japan (BoJ) holds more than half of the government bonds in circulation, and it has begun tapering its purchases. In response to soaring yields — and to stabilize the market — the Ministry of Finance decided to reduce the issuance of these super-long bonds in favor of shorter-term securities.

Our dataset also allows us to explore Mini-20-Year JGB Futures — a smaller-sized derivative contract traded on the Osaka Exchange. This product is designed to let investors hedge or speculate on interest rate movements tied to 20-year JGBs.

This market was basically dead during the BoJ's 7-year Yield Curve Control (YCC) policy, but it roared back to life last month. While 10-year JGB futures generally remain more actively traded over time, the easing of the YCC policy increased yield volatility along the curve, especially for longer maturities like the 20-year bond. This increased volatility, in turn, has created more need for hedging and opportunities for speculation.

Institutions such as life insurers need to hedge against further declines in long-dated JGB prices. The Daiwa Bond Index for long-dated government securities demonstrates why, as we show in our final chart: returns have fallen significantly amid a steepening yield curve, which in turn is driven by policy shifts and rising inflation expectations.

Since the 30-year auction, Japan has also sold 5-year bonds — with this sale seeing the weakest demand since 2020 amid prospects for tighter monetary policy and concerns about poor market liquidity.

Click here to read about JB auction results.

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