Japan's 10-Year Bond Demand Soars to 14-Month High, BOJ's Bond Purchase Cuts Still Uncertain

TradingKey - Japan's 10-year government bond auction demand reached its highest level since April 2024, driven by rising yields that attracted investors. 

On Tuesday, June 3rd, Japanese government bond futures rose to 139.12, while the 10-year bond yield fell by three basis points to 1.477%. The ¥2.6 trillion ($18 billion) bond auction saw the bid-to-cover ratio, an indicator of demand, climb to 3.66 from 2.54 in last month's auction, surpassing the past year’s average.

Ken Matsumoto, a macro strategist at Crédit Agricole in Tokyo, noted that the bond auction temporarily eased market tensions. However, he cautioned that the market may be more concerned about the upcoming auction of 30-year ultra-long bonds scheduled for June 5th.

Globally, confidence in long-term bonds is waning. The Bank of Japan (BOJ), the largest holder of Japanese government bonds, has significantly reduced its bond purchases, causing sharp fluctuations in the yield curve and heightening investor concerns. Recent reports indicate a lack of consensus within the BOJ regarding future bond purchase reductions.

Makoto Sakurai, a former member of the BOJ's Monetary Policy Committee, suggested on Monday that due to fears of surging Japanese government bond yields, the BOJ might decide to halt the planned reduction in bond purchases for the next fiscal year during its meeting this month. Since last summer, the BOJ has been cutting its government bond purchases by ¥400 billion ($2.8 billion) every quarter.

On the other hand, BOJ Governor Kazuo Ueda hinted that the central bank might continue to slow down government bond purchases in the next fiscal year. On Tuesday, he stated that maintaining a balance between predictability and flexibility makes it appropriate to continue reducing bond purchases. He expressed a desire to let the market determine bond yield levels to restore market functionality.

The BOJ plans to announce its bond purchase strategy for the fiscal year beginning in April next year later this month, though the specific timeline remains unclear.

Currently, Japan's 30-year government bond yield has retreated from a high of 3.185% at the end of last month to around 2.95%. However, with bond auctions on Tuesday and Thursday impending, the government faces mounting pressure to adjust its borrowing strategy and calm investor sentiment.