(Bloomberg) -- Stronger demand at Japan’s 10-year bond sale brought some temporary relief as traders position for another auction in less than 48 hours that will test appetite for longer-dated debt.
Government bond futures inched up to 139.15 as of 3:45 p.m. in Tokyo after a key gauge of demand at Tuesday’s auction rose to the highest since April 2024. Ten-year bond yields fell 2.5 basis points to 1.48%. Investors are still wary as the market has to absorb 30-year supply on Thursday against a backdrop of rising long-term yields globally.
“It was a good result as the 1.5% level was easy to buy at,” said Miki Den, a senior rates strategist at SMBC Nikko Securities Inc. in Tokyo. “Although this will support the bond market, it’s unlikely that yields will fall rapidly,” with the 30-year auction looming.
Confidence in longer-maturity notes globally has been crumbling as investors are concerned about massive budget deficits, which may result in heftier debt loads in some of the world’s biggest economies. On top of that, the Bank of Japan’s pullback from its huge bond purchases has led to a sharp steepening of the nation’s bond curve and heightened worries about government borrowing.
In a sign of concern about the investor base for Japanese bonds, the government is urging more domestic buying of the notes, according to a draft of its annual fiscal policy plan seen by Bloomberg.
The selloff in Japanese bonds has been exacerbated by concerns about which investors will step in as the BOJ reduces its holdings. Governor Kazuo Ueda hinted that the central bank may continue to slow the pace of government bond buying next fiscal year, in response to questions in parliament Tuesday. The central bank will review its bond purchase plan at its June 16-17 policy meeting.
After years of yields being pinned down at artificially low levels by the central bank, Japan’s bond market is now experiencing a painful transition to normal functioning. This was laid bare by a lack of demand at Japan’s 20- and 40-year debt sales last month.
Investors will be paying close attention to the 30-year auction after yields last month hit 3.185%, the highest level since the tenor was first sold. Thirty-year yields rose half a basis point to 2.935% on Tuesday afternoon in Tokyo.
Since last summer, Japan’s central bank has been reducing its purchases of government bonds by ¥400 billion ($2.8 billion) every quarter, but that process will likely come to a halt, former board member Makoto Sakurai said in an interview Monday in Tokyo.
Speculation has increased that the finance ministry may adjust its debt sales after it sent a questionnaire last week to market participants asking their views on issuance and the current situation.
That news “may have reduced concerns about the problems in the super-long sector spilling over into 10-year bonds,” said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management Co.
The bid-to-cover ratio at the ¥2.6 trillion sale of 10-year notes rose to 3.66, compared with 2.54 at last month’s auction, and higher than the average over the past year.
“With the 30-year bond auction coming up on Thursday, the fog will not lift all at once, but this result is rather good news,” said Inadome.
--With assistance from Masaki Kondo, Naoto Hosoda, Hidenori Yamanaka, Eddy Duan and Yuko Takeo.
(Adds government’s draft fiscal policy plan in fifth paragraph, updates bond yields.)