An auction of 40-year Japanese government bonds (JGBs) recently attracted the lowest demand in nearly a year, underscoring investor caution as yields on ultralong bonds rise globally.
The bid-to-cover ratio for the sale declined to 2.21, marking its lowest point since July 2024, down from 2.92 at a similar auction in March. This soft demand reflects broader worries about fiscal deficits and the impact of rising yields on government borrowing costs, both in Japan and other major economies.
On May 28, Japan’s Ministry of Finance sold approximately 500 billion yen ($3.46 billion) of 40-year bonds at a yield of 3.135%. Following the auction, yields on 30-year JGBs briefly surged 11 basis points to 2.94% before retreating slightly, while yields on 20-year and 40-year bonds also increased significantly. These movements align with a global trend of rising long-term yields, driven in part by concerns over economic growth and fiscal policy amid heightened geopolitical tensions and trade uncertainties.
The rise in superlong JGB yields signals a shift in investor appetite, with domestic buyers showing less interest in longer maturities. This trend mirrors developments in the US Treasury market, where yields have also climbed amid similar concerns. Additionally, Japan’s gradual monetary policy shift — including the Bank of Japan (BOJ) reducing bond purchases and beginning interest rate hikes — has contributed to the changing market dynamics.
Despite the sharp movements in yields, analysts suggest the situation remains manageable. Thomas Mathews, head of Asia-Pacific markets at Capital Economics, noted that Japanese authorities have tools at their disposal, such as adjusting bond issuance profiles and potentially increasing reinvestment of maturing bonds by the BOJ to stabilize the market.
BOJ Governor Kazuo Ueda emphasized the central bank’s commitment to closely monitoring the superlong bond market and its potential impacts on other interest rates. He noted that short- and medium-term rates have a more direct effect on the economy, which may temper the concerns about rising superlong yields.
However, former BOJ policy board member Takahide Kiuchi warned that further rate hikes could push superlong yields higher and risk market destabilization. This comes as the Japanese government faces ongoing challenges related to its substantial debt burden and the need to balance fiscal sustainability with economic growth.
The demand slump for long-term JGBs also highlights a wider shift in Japan’s bond market. The BOJ, historically the largest holder of government debt, has been reducing its bond holdings as it exits a long period of economic stimulus. Meanwhile, domestic institutional investors, such as life insurers and pension funds, have not increased their purchases to fill the gap, often awaiting greater market stability.
Foreign investors have shown some interest, with record purchases of Japanese debt with maturities over 10 years in recent months, partially reflecting a broader “Sell America” trade amid concerns about US economic and fiscal conditions. Still, their holdings remain small compared to domestic players.
Globally, the rise in long-term bond yields is linked to factors including increased tariffs and geopolitical tensions, which have fueled concerns about economic slowdowns and looser fiscal policies. In the US, similar pressures have driven a notable selloff in Treasuries, exacerbated by recent credit rating downgrades.
The implications of rising yields and weaker bond demand in Japan extend beyond its borders. Higher yields can increase borrowing costs for governments and corporations, potentially slowing growth and triggering capital flows back to Japan from overseas markets, especially the US This “repatriation” could amplify volatility in global financial markets.
Market observers caution that the evolving dynamics in Japan’s government bond market could disrupt longstanding trends, particularly the yen carry trade — where investors borrow cheaply in yen to invest in higher-yielding assets abroad. With the yen strengthening by over 8% this year and rising yields domestically, the unwind of such trades may continue, adding pressure to global markets.
In response to these challenges, Japan’s Finance Ministry is reportedly considering reducing issuance of longer-term bonds to better align supply with demand. The BOJ is expected to review its bond-buying strategy in upcoming meetings, with Governor Ueda reaffirming the bank’s readiness to act if necessary to maintain market stability.
As Japan navigates these complex pressures, officials underscore the importance of sustainable economic growth to support fiscal health and reassure investors. Finance Minister Katsunobu Kato highlighted that addressing fiscal issues firmly depends on achieving strong long-term growth.
With input from Bloomberg, CNBC, the Wall Street Journal.
