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A closely monitored auction of Japanese government debt for 40 years has elicited lowest demand in 10 months as concerns grows in the world’s third largest bond market.
The demand for the government’s offer of approximately $3.5 billion on 40-year bonds on Wednesday reflects a bid rate of 2.2 (the number of bids on securities), the lowest level since July 2024, reflecting what is called a “buyer strike” among Japanese life insurance companies and other domestic participants.
Bonds recovered Tuesday after reports that the Treasury is investigating prime brokers and investors sparked speculation that the government could reduce the issuance of ultra-long debt as a measure to calm the market. JGB yields in 40 years moved backwards to prices, dropping to a three-week low of 3.29%.
However, prior to the auction, yields rose to 3.32% on Wednesday morning, moving up to 3.37% since the auction results were published. Analysts said demand was in line with expectations while it was low.
“The headlines will be the lowest since last July, but in the broad shocking context of yields, the results were not shocking – soft and consistent with where you expect, given the unknowns about what the Treasury will do.”
The results of Wednesday’s auction for JGB for 40 years, held every two months, were under unusually intense speculation last week as very weak demand rose to a high of 2.6% years later at 20-year bond auctions.
The yield on bonds in 30 years peaked at 3.185%, with 40 years notes yielding 3.675%.
The sale fueled many years of debate on long-term financial stability, along with Prime Minister Isba’s recent comparison of Japan’s situation with Greece. Japan’s debt-to-GDP ratio has exceeded 200% since the start of the Covid-19 pandemic.
Barclays analysts said last week’s 20-year JGB auctions helped to confirm the structurally vulnerable balance of supply and demand in the very long JGB market due to the lack of demand in the private sector in the country.
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Ahead of 40 years of auction on Wednesday, the Minister told reporters he was closely monitoring the bond market, with Bank of Japan Governor Ota telling the central bank that he is looking at extremely long yield volatility due to the knock-on effect on the short edge of the curve.
Last week’s extremely long JGB surge came as part of a wide global sale of long-standing bonds in developed economies, as investors focus on the risk of increasing government spending in countries with already large debt burdens.
However, Japan’s bond market is raising many specific concerns as the country gradually emerges from a long experiment with ultra-loose monetary policy. Last June, BOJ said it would begin trimming JGB purchases at a pace of 400 million yen ($2.755 billion) for the quarter from August 2024 to March 2026, focusing on the strength of private sector demand.
