Market Braces for Pivotal 20-Year Japan Bond Sale as Yields Rise

KareemSci/Tech2025-07-101520

(Bloomberg) — An auction of 20-year Japanese government bonds Thursday will beam the searchlight back on rising yields as a looming election heightens concerns about fiscal expansion.

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The sale is just one of several in major debt markets this week as increasing yields on some longer maturities show how investors are worried about widening budget deficits. While yields on 10-, 20- and 30-year Japanese bonds moved lower during morning trade in Tokyo, they remained within reach of recent highs.

“It is unlikely that major Japanese institutional investors, including banks and life insurers, will actively bid” in the auction, as they await the results of the July 20 election and their impact on fiscal policy, said Ryutaro Kimura, a senior fixed-income strategist at AXA Investment Managers Japan Ltd. in Tokyo.

Speculation of less demand comes amid risks to the budget with the ruling Liberal Democratic Party and its coalition partner seeking to entice voters with cash handouts while opposition lawmakers push for lower taxes. In addition, uncertainty over tariffs, with Japan scrambling for a deal after US President Donald Trump announced they will be increased to 25% from Aug. 1, may deepen the risk of the economy entering a technical recession.

The auction results are due at 12:35 p.m. Tokyo time, and traders will be on the watch for the bid-to-cover ratio, which measures the level of interest from investors. Another important metric is the tail, which measures the gap between the average and lowest-accepted prices. A wider reading tends to indicate weaker demand.

The 20-year bond auction may be supported by a reduction in issuance and the relatively stable liquidity of 20-year debt within the super-long sector, wrote Kazuya Fujiwara, a fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities, in a report.

Last month’s 20-year bond sale showed some wariness in the market, even after the government adjusted its borrowing plan to calm surging yields. Japan will trim the volume of 20-, 30- and 40-year bonds sold in regular auctions by a combined ¥3.2 trillion ($22 billion) through the end of March 2026. The changes came into effect from July, and though this helped some recent sales such as the 30-year last week, yields have still pushed higher.

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What Bloomberg Strategists say:

The way in which JGB yields have been climbing into Thursday’s auction is eerily similar to May, when the 20-year sale flopped, with the biggest tail since 1987. The risk of a repeat outcome is rising as Japanese bond traders face pitfalls in every direction they look.

—Mark Cranfield, Markets Live Strategist, Singapore. For the full analysis, click here.

“If the 20-year auction came out weak, in this market condition it would affect the 10-year sector in a negative way,” said Shoki Omori, chief strategist at Mizuho Securities Co. in Tokyo, referring to the most liquid Japanese government bond.

Sovereign bond yields surged globally earlier this week, with the 30-year Treasury yield heading back toward 5% as some of the world’s biggest banks sent fresh warnings over fiscal spending concerns. US Treasuries rallied on Wednesday after an auction of 10-year notes drew strong demand, easing concerns that investors will balk at financing swelling US deficits.

In Japan, some major life insurers continue to be skeptical. Meiji Yasuda Life Insurance Co. said it plans to avoid actively investing in Japanese super-long-term government bonds for the next year or two as interest rates may rise and supply pressures build. This is right when the central bank - the dominant holder - is trying to gradually back out of the market.

—With assistance from Naoto Hosoda.

(Adds quote from Bloomberg strategist)