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Yields on the longest-dated Japanese government bonds surged to record highs on Tuesday after a dismal debt auction added to investor fears of a lack of demand.
The yield on the 30-year bond rose as high as 3.14 per cent, while that on the 40-year bond reached an all-time high of 3.61 per cent, with both rising by as much as 0.17 percentage points. Yields move inversely to prices.
The 20-year bond yield jumped by 15 basis points to as high as 2.56 per cent following an auction in which the gap between the average and lowest prices — known as the tail — was the biggest since the late 1980s.
Rates traders in Tokyo said Tuesday’s moves reflected growing concerns over the effects of the Bank of Japan’s tapering of its bond purchases, the economic risks posed by US trade tariffs and Japan’s gross national debt, which stood at more than 200 per cent of annual GDP.
Investors are also concerned that the sell-off could hit assets globally if Japanese institutions and investors change their behaviour and start to move money home.
The sharp moves higher in yields “risk contagion and further weakness in the long end of global bond markets” as they encourage Japanese investors to bring cash home, said Mike Riddell, a fund manager at Fidelity Investments.
Mark Dowding, fixed income chief investment officer at RBC BlueBay Asset Management, said the Japanese Ministry of Finance “arguably . . . should be responding to market conditions by changing its issuance schedule and should stop issuing long-dated bonds until volatility drops and market conditions normalise”.
Tuesday’s leap in yields comes amid sharpening scrutiny of the effects of tapering by the BoJ as part of its attempts to “normalise” monetary policy after years of ultra-loose policy.
The central bank has been gathering opinions from market participants on how the first year of tapering has gone and what risks might have emerged. In a summary of opinions from banks and brokers published on Tuesday shortly after the auction results, some participants said the BoJ should stop the tapering of purchases of super-long dated government bonds.
“Clear signs of a demand-supply mismatch” for long-dated debt might make the BoJ more cautious about how it exits the bond market ahead of a key meeting in June, said Derek Halpenny, head of research at MUFG.
The private sector will have to absorb about ¥60tn of extra debt in the fiscal year ending March 2026, according to Société Générale. Rates strategist Stephen Spratt pointed to broader questions around where domestic Japanese demand will come from as life insurers recently announced a shift in buying strategy away from the long end of the JGB curve.
Investors are also concerned about the unpopularity and political weakness of Prime Minister Shigeru Ishiba, who rules through a fragile coalition.
A growing number of political analysts think Ishiba, whose approval ratings are low and who has failed to secure any agreement with the Trump administration on tariffs, could become increasingly desperate ahead of upper house elections scheduled for July. Pledges of tax cuts could arise from that showdown, warn analysts, with potential implications for Japan’s fiscal position.
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