Demand for Japan’s 40-year government bond fell to its lowest level since July, pushing super-long yields sharply higher and increasing pressure on authorities to consider scaling back bond issuance.
Government bonds
Following the latest auction, the yield on the 40-year Japanese government bond rose by 5 basis points to 3.335% by mid-morning, while the 30-year yield climbed 7 basis points.
The 40-year yield surged to a record 3.675% last week amid growing concerns about rising debt levels in Japan and other developed economies, including the United States. These worries triggered a broad sell-off in long-dated bonds.
Super-long Japanese government bonds have struggled to attract support from traditional buyers such as life insurers and pension funds, which have been steadily reducing their purchases.
Rising Japanese bond yields could prompt a wave of capital repatriation, as domestic investors begin pulling funds back from overseas markets. Analysts warn there may be a threshold at which investors rapidly shift capital from the US back to Japan.
Some strategists have cautioned that a continued rise in Japanese government bond yields could pose serious risks to global financial markets if the trend accelerates.
The Ministry of Finance is scheduled to auction benchmark 10-year and 30-year bonds next week.
Big number
Japan’s Ministry of Finance sold approximately ¥500 billion, or about $3.5 billion, of 40-year bonds at Wednesday’s auction.
Possible adjustment
In a move that signaled potential changes to issuance policy, the finance ministry circulated a questionnaire to market participants on Monday evening seeking views on bond issuance and current market conditions. The timing and wide distribution of the survey were considered unusual and sparked a rally in super-long government bonds on Tuesday.
These developments followed renewed upward pressure on global borrowing costs last week, which pushed yields higher on long-term debt across major markets, from the US to Japan.
What to watch for
The Bank of Japan is set to hold its next policy meeting on June 16–17, where officials are expected to discuss possible adjustments to the pace of tapering its government bond purchases.
