Yields on Japan’s longest-dated government bonds surged to historic highs on Tuesday following a weak debt auction, raising worries about investor appetite and potential shifts in domestic and foreign investment behavior.
The yield on the 30-year bond climbed to 3.14%, while the 40-year bond yield hit an unprecedented 3.61%, both increasing by as much as 0.17 percentage points. Meanwhile, the 20-year bond yield rose 15 basis points to 2.56%, marking one of the largest gaps between average and lowest prices—a measure known as the “tail”—since the late 1980s.
The sharp rise in yields, which move inversely to bond prices, reflects growing concern over the Bank of Japan’s (BoJ) ongoing tapering of its bond-buying program and broader economic risks, including the impact of US trade tariffs and Japan’s substantial national debt, which exceeds 200% of annual GDP.
Investors are increasingly apprehensive that Japanese financial institutions might respond to these pressures by liquidating foreign assets and repatriating funds, potentially triggering a ripple effect across global markets. Mike Riddell, a fund manager at Fidelity Investments, warned that this shift could lead to “contagion and further weakness in the long end of global bond markets.”
Mark Dowding, Fixed Income Chief Investment Officer at RBC BlueBay Asset Management, suggested that the Japanese Ministry of Finance might need to reconsider its bond issuance strategy, potentially halting long-dated bond sales until market volatility stabilizes.
The auction results also intensify scrutiny of the BoJ’s efforts to “normalize” monetary policy after years of ultra-loose measures. In a report published shortly after the auction, market participants expressed concerns over the tapering of super-long government bond purchases, with some advocating for a pause in the process amid clear signs of demand-supply mismatches.
Derek Halpenny, Head of Research at MUFG, noted that the BoJ may adopt a more cautious approach ahead of its June policy meeting, given these market signals. The private sector is expected to absorb an additional ¥60 trillion in government debt in the fiscal year ending March 2026, according to Société Générale, while shifts in buying patterns by major life insurers—traditionally key buyers of long-term Japanese government bonds (JGBs)—add to uncertainty.
Political factors also contribute to market unease. Prime Minister Shigeru Ishiba, leading a fragile coalition and facing low approval ratings, has yet to reach an agreement with the US administration on tariffs. Analysts predict that upcoming upper house elections in July may prompt tax cut pledges, potentially complicating Japan’s already strained fiscal position.
The auction underscored growing jitters, as the bid-to-cover ratio for the 20-year bond sale fell to its lowest level since 2012. The benchmark 10-year yield increased to 1.525%, the highest since March, and 40-year yields rose ahead of an upcoming auction for that maturity. Katsutoshi Inadome, Senior Strategist at Sumitomo Mitsui Trust Asset Management, described the auction results as “worse than expected.”
Although foreign investors purchased record amounts of super-long Japanese bonds in April, their overall market share remains small. Domestic buyers, particularly life insurers, are reducing holdings, leaving a gap that the BoJ had historically helped fill through large-scale purchases. The central bank is currently consulting with banks and securities firms to gauge views on the pace of quantitative tightening amid the rising yields.
Prime Minister Ishiba expressed caution about funding tax cuts through additional bond issuance, highlighting Japan’s precarious fiscal situation.
“Our country’s fiscal situation is undoubtedly extremely poor, worse than Greece’s,” he said in parliament.
Market strategists highlight that the super-long segment of Japan’s bond market is experiencing a kind of domestic buyer’s strike, even as global investors increase their exposure. The auction’s low demand and significant price tail reflect deteriorating market conditions spreading from the longest maturities to the 20-year sector.
With input from the Financial Times and Bloomberg.
