Demand for Japan's 20-Year Bonds Hits Five-Year High: Can the Market Breathe Easier?

TradingKey - On Wednesday, September 17, demand for Japan's 20-year government bonds reached its strongest level since 2020, as their higher yields attracted investors.

The auction's average bid-to-cover ratio hit 4.00, the highest since May 2020, significantly surpassing the previous auction's 3.09 and the 12-month average of 3.2. Meanwhile, the tail, the gap between the average and lowest accepted price, narrowed to 0.10, indicating robust demand.

This auction marked the first ultra-long Japanese bond sale since Prime Minister Shigeru Ishiba announced his resignation on September 7. Following his unexpected departure on September 8, yields on 30-year Japanese bonds surged to a historic high of 3.28%, catching up to the peak set on September 3.

Analysts attributed this to market expectations that Ishiba's successor might favor aggressive fiscal stimulus, potentially leading to uncontrolled government spending and escalating risks for Japan's long-term bonds.

Commenting on the strong demand demonstrated in this auction, Homin Lee, Senior Macro Strategist at Lombard Odier Singapore Ltd., noted that attractive pricing might have been one factor spurring recent interest in Japanese bonds from the market and institutions. The auction results provided a welcome respite for the Japanese bond market. Additionally, the auction might alleviate pressure on Japan's Ministry of Finance, with Mizuho Securities' Chief Strategist Shoki Omori stating that the outcome bolstered market confidence in government financing.

Next week will see the auction of 40-year Japanese bonds, with traders closely watching demand for ultra-long maturities. Whether the strong demand for long-term bonds can continue remains uncertain. Masayuki Koguchi, Executive Chief Fund Manager at Mitsubishi UFJ Asset Management, advised that, given the auction's timing just before the Liberal Democratic Party's vote, investors should exercise caution. MLIV Macro Strategist Mark Cranfield highlighted that political changes could introduce uncertainty to the bond market. Furthermore, if Bank of Japan Governor Kazuo Ueda hints at a rate hike in October, earlier than the anticipated December, it may pose risks to Japanese bonds.