Japan's 40-Year Bonds Fall Due to Weak Demand, Yield Rises to 3.335%

US and European Bond Yields Also Rise in a Day

Increased Government Spending and Budget Deficit Concerns Heighten Pressure on Bonds

The auction for Japan's 40-year bonds fell again amid weak demand, causing Japanese bond yields to rise. This also led to an increase in US and European bond yields.

On the 28th (local time), according to Bloomberg and Reuters, the bid-to-cover ratio, a demand indicator for the 500 billion yen (approximately 4.76 trillion won) worth of Japanese bonds maturing in March 2065, was 2.21. This was significantly lower than the bid-to-cover ratio of 2.92 during the March auction. A bid-to-cover ratio around 3 typically indicates weak bond-buying sentiment for Japanese long-term bonds.

As a result, the yield on the 40-year bond rose by 5 basis points (1bp=0.01%) to 3.335% on this day. Bond yields and prices move in opposite directions. After recording the lowest demand since 2012 in last week's 20-year bond auction, the yields on 40-year and 30-year bonds reached record highs.

The US 10-year bond yield rose by 3.7bp to 4.47% on this day. The 30-year bond yield increased by 3.8bp to 4.979%.

Japan's government bond sale on this day became a global test for long-term bonds amid concerns that increased government spending poses a risk of budget deficits. In Japan, it was seen as an indicator of whether large institutional investors like life insurers would fill the gap created by the Bank of Japan's (BOJ) tapering of bond purchases.

Ataru Okumura, chief rate strategist at SMBC Nikko Securities, pointed out that "the poor performance of the 40-year bond auction is due to continued high volatility and expectations that the issuance size will not decrease."

Last week, speculation arose in Japanese political circles that ahead of the July House of Councillors election, consumption tax would be reduced and the shortfall in social security funds would be covered by deficit bonds, causing yields on 20-year and 30-year bonds to surge.

Currently, Japan's government debt is 2.5 times larger than its gross domestic product (GDP). Additionally, the BOJ is significantly reducing bond purchases due to inflationary pressures, embarking on quantitative tightening (QT).

Japan's Ministry of Finance plans to sell benchmark 10-year and 30-year bonds next week.

Tom Nakamura, vice president and head of bonds and currencies at Canadian fund AGF Investments, noted, "While the market seems more orderly now, the fundamental causes of medium- to long-term concerns (such as fiscal deterioration) have not disappeared." He stated that he has shifted his portfolio to markets with healthier fiscal conditions or higher yields, like Germany, Poland, and Romania.

As a signal of readiness to adjust issuance volumes after the bond crash, Japan's Ministry of Finance sent a questionnaire to market participants earlier this week asking for opinions on issuance and current market conditions. This was interpreted as a signal that issuance might decrease, triggering a rally in Japanese, US, and European ultra-long-term bonds the previous day.

Last week, as global borrowing costs rose aggressively, long-term bond yields in the US, Japan, and Europe increased.

Kazuhiro Sasaki, head of research at Phillip Securities, mentioned, "If Japan's long-term bond yields rise, it could be positive as it indicates the Ministry of Finance might take action."

Next month is expected to be a crucial turning point for the Japanese bond market. The BOJ is anticipated to hold a policy meeting on June 16 and 17 to discuss potential changes to bond purchase reductions.

Guest reporter Kim Jeong-a kja@hankyung.com