Japanese Bonds Stabilize as MOF Surveys Dealers, Easing Global Rate Fears

After weeks of turmoil in Japan's long-term government bond market, signs of stabilization are emerging thanks to a rare move by the country’s Ministry of Finance (MOF). Over the weekend, the MOF quietly distributed a questionnaire to primary dealers and market participants, seeking views on demand for long-dated Japanese government bonds (JGBs). The effort has been interpreted by many as a precursor to a potential pullback in super-long bond issuance, a move aimed at calming a market rattled by soaring yields.

Yields on Japan’s 30-year JGBs fell 19 basis points to 2.85% on Tuesday, while the 10-year yield dropped 5 basis points to 1.46%. This retreat follows a sharp rise that took the 30-year yield above 3% last week, a level not seen since 1999. The relief in Japan has spilled over into global markets, with the 30-year U.S. Treasury yield dropping 7 basis points to 4.96% and European bonds also rallying.

The MOF’s outreach to the market—a notable departure from its typical top-down communication style—suggests that Tokyo is preparing to scale back supply of longer-dated JGBs. This comes after a failed 20-year JGB auction last week, which saw the lowest demand in a decade, raising alarms about the sustainability of demand for Japan’s debt. As one strategist from JPMorgan noted, "The questionnaire looks like it is part of a strategy to prepare the market for a temporary scaling back of super long JGB issuance".

The deterioration in demand has multiple causes. For one, the Bank of Japan (BOJ) has been steadily tapering its once-massive bond buying program. Meanwhile, Japanese life insurers and other traditional buyers of long-term paper have largely remained on the sidelines. This so-called "'buyers' strike" has exposed the fragility of Japan’s debt market, which faces structural challenges from a ballooning debt-to-GDP ratio that now exceeds 200%.

The MOF is reportedly considering tweaking its bond issuance mix as early as July. While the overall issuance size will remain unchanged at 172.3 trillion yen for fiscal 2025, a shift toward shorter maturities is likely. This approach mirrors similar moves in the UK and other markets where governments have leaned toward issuing shorter-term debt amid declining long-end demand.

Investors have taken this shift as a sign that authorities are serious about restoring market confidence. MUFG analysts suggest the MOF's move reflects "increased concerns over yields following the poor 20-year auction last week and ahead of a 40-year bond auction". Strategists at Societe Generale added, "We've been arguing that something had to give to correct the supply-demand imbalance. The market is thinking it will be the MOF".

This weekend’s developments have also helped lift risk sentiment globally. As Japanese bond yields eased, U.S. equities opened higher on Tuesday. Traders attributed some of the early bid to relief that Japan’s debt market may no longer be a source of volatility for global rates. This is significant, given that Japan remains the largest foreign holder of U.S. Treasuries, with more than $1.13 trillion in holdings. Rising JGB yields had raised fears that Japanese capital might flow home, placing pressure on U.S. yields.

The stabilization of long-term JGBs provides temporary relief, but broader questions remain. Japan’s Prime Minister Shigeru Ishiba has floated additional fiscal stimulus ahead of the upper house election in July, and the BOJ’s long-term tapering strategy remains unclear. Analysts are watching closely to see if the central bank will alter its 2026 taper plans in response to recent market volatility.

Moreover, the global context remains challenging. U.S. debt concerns have mounted following the House passage of a $4 trillion reconciliation bill, while Moody’s downgraded U.S. debt to Aa1 earlier this month. As ING’s Benjamin Schroeder put it, "Long-end yields are experiencing some relief, but U.S. yields will find it difficult to shake off a bearish taint over the coming weeks and months. The fiscal trajectory still matters".

In sum, the MOF’s outreach to primary dealers may mark the start of a tactical shift in Japan’s approach to managing its colossal debt burden. While it has offered temporary support to both local and global bonds, the underlying fragilities in sovereign debt markets—from Tokyo to Washington—mean investors are unlikely to let their guard down.

For now, though, equities are taking the hint. With JGB yields off their highs, Treasury yields down, and fewer bond market headlines roiling risk assets, bulls have reason to breathe a bit easier—at least for today.