Japan's 40-Year Bond Auction Sees Lowest Demand Since November 2022

On Wednesday, investors anxiously awaited the results of Japan's 40-year government bond auction, as fluctuations in the country's bond yields continued to impact global debt markets. The Ministry of Finance issued 500 billion yen (approximately 3.5 billion USD) in bonds maturing in March 2065. The auction results revealed a bid-to-cover ratio of 2.2, which was lower than the previous auction's 2.9 and below the expected 3. This marked the lowest demand level since November 2022, following a similarly weak demand for 20-year Japanese government bonds the previous week.

The subdued response to the bond auction comes at a critical time, as global borrowing costs faced significant upward pressure last week. The auction's outcome is seen as a key test for long-term bonds, with concerns about rising government spending pushing fiscal deficits to dangerous levels. The Bank of Japan's reduction in bond purchases, coupled with institutional investors' reluctance to fill the gap, has exacerbated challenges in the Japanese bond market.

Following the release of the auction results, Japanese government bond futures continued their downward trend. The dollar briefly fell 36 points against the yen, reaching 144.53. The auction's outcome suggests that the upward trend in bond yields may persist, despite a brief rebound in super-long-term Japanese bonds on Tuesday. The 40-year bond yield had fallen by 25 basis points earlier in the week, amid indications that the Ministry of Finance might adjust its bond issuance plans to calm market volatility. However, the yield resumed its upward trajectory on Wednesday morning, raising concerns about the sustainability of the recent rebound.

Market participants are closely watching developments in Japan, as the country's bond market dynamics have ripple effects on global markets. The upcoming June policy meeting of the Bank of Japan is expected to address the potential adjustment of its bond purchase tapering plan. Concurrently, the Ministry of Finance is seeking market participants' input on bond issuance plans, reflecting the government's efforts to stabilize the market. The Ministry of Finance's recent survey of market participants, seeking their views on bond issuance plans and current market conditions, underscores the government's proactive approach to addressing market concerns.

Analysts and market participants have expressed varying views on the potential impact of the bond auction results. Some suggest that the upward pressure on 40-year bond yields may persist until key events in June are resolved. Others emphasize the need for policymakers to closely monitor long-term bond market dynamics and communicate their intentions effectively to maintain market stability. The Bank of Japan's governor, Kazuo Ueda, has pledged to closely monitor the potential spillover effects of rising long-term yields on medium- and short-term rates, acknowledging the direct impact of short-term rates on economic activity.

Ueda's recent statements, which were more specific than his previous remarks, have helped alleviate some market anxieties. However, the Bank of Japan has also indicated that direct market intervention remains a last resort, given the market distortions caused by a decade of large-scale monetary easing, including the now-defunct yield curve control policy. As the Bank of Japan prepares to review its bond purchase plan ahead of its June policy meeting, Ueda's comments have garnered unusual attention. The central bank's recent consultation with market participants included references to the limited operational space for addressing supply-demand imbalances in the super-long bond market, signaling a cautious approach to policy adjustments.