Japanese Bond Yields Move Higher Despite Smooth 30-Year Sale

NiklausBusiness2025-07-041510

(Bloomberg) -- Renewed concerns about fiscal spending globally pulled Japanese bond yields higher even after a 30-year government bond auction drew a level of demand that shows policymakers are having some success in quelling debt-market volatility.

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The bid-to-cover ratio was at 3.58, the strongest since February, and well above 2.92 at the sale in June. But the minimum bid price was lower than expected in a sign that some in the market are still cautious. Yields across the curve rose, with the 30- and 40-year bond yields both adding 8 basis points to 2.965% and 3.14% respectively.

“The sharp rise in long-term interest rates in the UK due to concerns over fiscal expansion is likely contributing to anxiety over Japan’s own fiscal outlook,” said Kazuya Fujiwara, a bond strategist at Mitsubishi UFJ Morgan Stanley Securities Co.

Yields are being dragged higher by a surge in government borrowing costs globally, driven by a surge in yields Wednesday in the UK and US. Even so, some in the market said the auction results suggest that Japan may be able to dodge a repeat of the market turmoil triggered by sales of longer-maturity bonds in May after the Ministry of Finance announced a plan to cut bond sale amounts for longer maturities.

The MOF said in June it would reduce offerings of 20-, 30-, and 40-year debt from this month by a combined ¥3.2 trillion ($22 billion) through the end of March 2026. Meanwhile, the Bank of Japan said it would slow its pullback from debt purchases.

“Not stellar, but good enough,” said Martin Whetton, head of financial markets strategy at Westpac Banking Corp., of the auction results. “Because this was well telegraphed it was likely a buy-the-rumor, sell-the-fact event, but going forward, as the market gets used to lower supply it should be constructive.”

The bid-to-cover ratio at the 30-year auction compares with a 12-month average of 3.33. The tail, or gap between average and lowest-accepted prices, came in at 0.31, versus 0.49 at the previous sale.

There was a certain level of demand at the auction, but it still showed a fair amount of caution, said Shuichi Ohsaki, a senior portfolio manager at Meiji Yasuda Asset Management Co. in Tokyo. “This auction felt somewhat weak, but it is unlikely to cause turmoil in the bond market,” he said.

Story Continues

Earlier this week, relatively strong demand at Japan’s sale of 10-year sovereign notes soothed the market, although a plunge in UK gilts Wednesday was a fresh reminder of heightened concerns about fiscal spending globally.

What Bloomberg strategists say...

“Today’s 30-year JGB auction passed with solid metrics, with a notable improvement in the bid-to-cover ratio to 3.58, although the lowest actual price was below forecasts.

However, the big test will come in the secondary market where a yield of around 2.8% doesn’t look exciting in the context of this year’s 30-year high of 3.2%. Then there is the pressure on gilts, which could roil G-10 debt again later today.”

—Mark Cranfield, Markets Live Strategist, Singapore. Read more on MLIV

Global trends and an election this month in Japan are likely to keep investors on guard over the ability of governments to cover massive budget deficits. The challenge for Japan to limit gains in 30-year yields is made harder because big local buyers such as life insurers have turned away from purchases of this maturity.

“Though we still need to see the upcoming 20-year auction to fully understand investor appetite for the long-end I feel this auction gave some relief for long-end investors,” said Shoki Omori, chief strategist at Mizuho Securities Co., referring to a sale of 20-year debt on July 10.

The Liberal Democratic Party’s Policy Chief and former Defense Minister Itsunori Onodera said in an interview with Bloomberg last week that the country’s fiscal outlook was already facing a “yellow alert.” Expenditures may climb as Japanese Prime Minister Shigeru Ishiba sets pay raises and a ¥1 quadrillion economy as the top campaign promises for this summer’s upper house election.

--With assistance from Masahiro Hidaka and Hidenori Yamanaka.

(Updates with yield moves in second paragraph, quote in third.)