U.S. Treasuries Weather Downgrade Fears, but Japanese Bonds Collapse — Is the Yen About to Crash?

TradingKey - While global investors are still assessing the implications of the U.S. losing its last AAA sovereign credit rating, a bond auction in Japan collapsed unexpectedly, potentially marking a turning point for the Bank of Japan’s (BoJ) tightening cycle — and raising concerns about an imminent yen collapse.

On Tuesday, May 20, the Japanese Ministry of Finance held a ¥1 trillion auction for 20-year government bonds, which ended in disaster:

• The bid-to-cover ratio dropped from 2.96x in April to just 2.5x, the lowest since 2012.
• The tail spread — a key indicator of demand weakness — surged to 1.14 basis points, the highest level since 198 , signaling weak investor appetite.

Analysts at Sumitomo Mitsui said the results were worse than expected. With rising fiscal risks and declining liquidity, long-dated bonds — including 30- and 40-year maturities — have been sold off. Now, the deterioration has even reached the previously stable 20-year segment.

A fund manager at Norinchukin Zenkyoren Asset Management said he is now avoiding ultra-long bonds altogether, citing growing fiscal risks and oversupply concerns. Bloomberg analysts noted that long-term Japanese bonds are now facing a similar “buyer’s strike” previously seen in the U.S. Treasury market.

Bond Market Selloff Triggers Sharp Rate Increases

In response to the failed auction, Japanese bond yields across all maturities surged sharply :

• The yield on the 10-year JGB rose to 1.53%, the highest since late March.
• The 20-year and 40-year yields jumped more than 10 basis points.
• The 30-year yield hit a new historical high.

The yen also came under pressure amid growing concerns over Japan’s fiscal sustainability. The USD/JPY pair is currently trading at 144.93, with a session high of 145.51.

BoJ Caught Between a Rock and a Hard Place

The Bank of Japan (BoJ) is by far the largest holder of Japanese government bonds (JGBs), owning over 52% of the total outstanding. After ending its decades-long negative interest rate policy and beginning a rate-hiking cycle earlier this year, the BoJ has started reducing its bond purchases.

However, the sharp drop in bond demand may now hinder the central bank’s tightening path.

On Tuesday and Wednesday, the BoJ will hold hearings to gather feedback from market participants on the future pace of its bond purchase reductions. The results will be announced at the June policy meeting.

Nomura analysts noted that ahead of the decision, the BoJ is trying to avoid surprising the market.

But some observers warn that the BoJ is now caught in a policy dilemma :

• On one hand, if it continues tightening and allows bond yields to rise further, it may be forced to reintroduce negative rates or restart Yield Curve Control (YCC).
• On the other hand, if it backs down under market pressure, halts QT, or even resumes QE, inflation could spiral out of control, pushing the yen toward a full-blown crisis.

Japan’s Economy Stumbles Before Trump Tariffs Even Kick In

Japan’s economic backdrop offers little support. In Q1 2025, Japan's real GDP contracted by 0.7% year-on-year, marking the first negative reading in over a year.

BNP Paribas warned that the impact of Trump’s tariff uncertainty could make the slowdown even more pronounced in Q2.