Japan's 30-Year Bond Auction Sees 21% Bid-to-Cover Ratio Improvement

Japan's 30-year government bond auction on Thursday saw a bid-to-cover ratio of 3.58, an improvement from 2.92 in the previous sale in June. The highest yield accepted at the auction, known as the auction’s tail, was 0.31 yen, down from 0.49 yen in the prior sale. This successful auction indicates a level of demand that suggests lawmakers are making progress in mitigating debt-market volatility.

Market strategists acknowledged the solid metrics of the auction, noting a significant improvement in the bid-to-cover ratio. However, the lowest actual price was below forecasts, indicating some market caution. Japanese bond yields, including the 30- and 40-year bond yields, surged by 8 basis points to 2.965% and 3.14% respectively, reflecting renewed concerns about fiscal spending globally.

Analysts believe that the sharp rise in long-term interest rates in the UK, due to concerns over fiscal expansion, is contributing to anxiety over Japan’s fiscal outlook. The increase in government borrowing costs globally is driving yields higher, especially with the surge in yields in the U.S., Germany, and the UK. The successful auction results suggest that Japan may be able to prevent a repeat of the market turmoil caused by sales of longer-maturity bonds in May. During that time, the Ministry of Finance unveiled plans to reduce bond sale amounts for longer maturities to sell fewer super-long bonds.

The Ministry of Finance promised to cut issuance of 20-, 30-, and 40-year debt from July by a combined 3.2 trillion yen in the next 9 months. The Bank of Japan also revealed that it would withdraw from credit acquisitions. Despite the high demand at the country’s 10-year bond sale, a drop in UK gilts reignited concerns about fiscal spending globally. Investors are still awaiting the upcoming 20-year auction to fully understand investor appetite for the long-end.

The Liberal Democratic Party’s Policy Chief and former Defense Minister Itsunori Onodera said in an interview that Japan’s fiscal outlook was already facing a “yellow alert.” He also expects expenditures to surge as Japanese Prime Minister Shigeru Ishiba sets salary increases and a one quadrillion yen economy as the top campaign promises for the upcoming upper house elections. Uncertainty around the upper house election is likely to hold back demand at the auction, as the fiscal policy stance of the government could change drastically depending on the election results.