Japan's Long-Term Bond Auctions Falter for Third Time; 30-Year Bond Demand at Two-Year Low, UBS Advises Cessation

TradingKey - On Thursday, June 5th, the Japan 30-Year Bond auction experienced lukewarm demand, reaching its lowest level since early 2023. 

The bid-to-cover ratio, a vital indicator of market interest, stood at just 2.92, falling short of the 12-month average of 3.39 and the previous auction's 3.07.

At the end of May, demand for 20-year and 40-year Japanese bonds was also significantly weak, with the 20-year bond hitting its worst record since 2012 and the 40-year bond at its lowest since last July. This reflects a declining appetite among investors for Japanese long-term bonds.

Bank of Japan Governor Kazuo Ueda has suggested that the central bank may continue to slow its bond purchase pace in the next fiscal year. Since last summer, the Bank of Japan has been reducing bond purchases by ¥400 billion ($2.8 billion) each quarter. 

As the largest holder of Japanese government bonds, the bank's continued reduction in bond purchases could further exacerbate market worries and impact yield curve stability. The purchasing plan for the fiscal year beginning in April will be announced at the board meeting on June 16-17.

Kevin Zhao, Head of Global Sovereign and Currency at UBS, advised that to mitigate bond market volatility, the government should cease issuing bonds maturing beyond 30 years, due to Japan's aging population diminishing the need for long-term bonds by life insurers and pension funds.

To address yield volatility, Japan’s Ministry of Finance has circulated a questionnaire to assess market views on bond issuance, indicating possible adjustments. Additionally, reports indicate that the Japanese government is encouraging domestic investors to increase their government bond holdings to prevent further yield spikes.