Japan's 20-year government bond auction attracted the strongest demand since 2019, driven by high yields that lured investors and a planned reduction in ultra-long-term bond issuance by the government at the start of the new fiscal year. Following Tuesday's bond sale, Japanese bond prices rose, with yields on both 20-year and 30-year bonds falling by 9 basis points. The bid-to-cover ratio increased to 4.82, up from 3.25 in the previous auction and above the 12-month average of 3.27, despite uncertainties surrounding Middle East conflict negotiations.
Miki Den, senior rates strategist at SMBC Nikko Securities, noted, "These bonds appear relatively inexpensive compared to other maturities. The reduction in ultra-long-term Japanese government bond issuance starting in April also played a significant role." The yield on Japan’s 20-year government bonds remains near its highest level since 1997, a peak reached earlier this year. Another indicator of strong demand was the smallest tail in the auction since 2023.
Investors are also assessing how a potential conflict involving Iran could influence the Bank of Japan's interest rate hike trajectory. Ahead of the BOJ’s policy decision on April 28, Governor Kazuo Ueda has kept policy options open and tempered market expectations for rate increases. Overnight index swaps suggest about a 30% chance of a BOJ rate hike in April, down from roughly 55% last Friday.
Wee Khoon Chong, senior markets strategist for Asia Pacific at BNY Mellon, commented, "The strong demand benefited from a broad rally in global bond markets and Governor Ueda’s cautious remarks on Monday. If oil prices decline and the market begins to price out some inflation premium, yields could fall further."
Bloomberg strategist Mark Cranfield added, "Investors believe the substantial spread between the BOJ’s target rate and 20-year bond yields justifies taking on risk, even with elevated inflation expectations. Additionally, Mitsubishi UFJ Financial Group and Nomura Securities led the buying, both regarded as reliable participants in Japanese government bond auctions."
U.S. President Donald Trump’s expressed willingness to resume talks with Iran has raised hopes for an agreement that could ease Middle East tensions. Japan is among the major economies most vulnerable to disruptions in oil shipments through the Strait of Hormuz, a passage for over 90% of its oil imports. Trump’s comments came as the U.S. Navy moved to block the strait, a step intended to increase pressure on Tehran.
At the same time, persistent yen weakness is driving up import costs and amplifying inflation risks. The yen has approached 160 against the U.S. dollar, prompting stronger warnings from Japanese authorities, who have previously intervened at similar levels.
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