Japanese government bonds experienced a brief rally following the country's first-ever issuance of a 30-year bond with a 4% coupon, which saw its strongest demand in seven years.
The initial rise in secondary markets partly reflected the attractive yields offered by ultra-long-term Japanese debt and was also supported by comments from a senior ruling party lawmaker who refuted claims that the government led by Sanae Takaichi is attempting to suppress borrowing costs.
However, this upward move was short-lived, reversing within hours. The yield on the 30-year JGB initially fell by as much as 7 basis points but later pared losses as investor focus returned to risks including rising government expenditure and the potential for the Bank of Japan (BOJ) to raise rates too slowly to contain inflation. At the time of writing, the yield was down nearly 2 basis points at 4.058%.
Miki Den, a senior rates strategist at SMBC Nikko Securities, noted that the high yield levels, which rose further in the morning, bolstered market demand. He suggested that the steepening trend in the ultra-long end of the yield curve may now pause, potentially marking a turning point towards curve flattening.
Data showed Tuesday's auction for the 30-year JGB recorded a bid-to-cover ratio of 4.55, the strongest demand since 2019. This compares with a ratio of 2.94 at the previous sale and a 12-month average of 3.41.
Markets Live strategist Mark Cranfield observed that the inaugural 4% coupon 30-year bond successfully attracted robust demand with minimal tail, and even the lowest accepted price was notably above pre-auction market expectations.
However, an analysis of the buyer composition suggests this does not represent a full endorsement of the bonds. A portion of the approximately 74% classified as 'unknown buyers' may be engaging in tactical trades rather than committing to long-term holdings.
Japanese bonds remain under pressure as the government unveils substantial spending plans aimed at reshaping the economy. Investors are concerned that expansive fiscal policy could increase the debt burden and potentially influence the Bank of Japan (BOJ)'s rate-hiking trajectory.
Recent reports indicate that after a brief period of capital inflows, top global bond fund managers are once again exiting the Japanese bond market at a notable pace. Analysts suggest this retreat stems not from valuation issues but from a deeper 'crisis of confidence'.
Foreign investors widely fear that the Bank of Japan (BOJ) is acting too slowly in the face of significant imported inflation and is highly susceptible to political pressure from the Takaichi administration, which could trap Japan in a vicious cycle of widening fiscal deficits and currency depreciation.
A draft strategy expected for approval in mid-July states that appropriate monetary policy management is "essential for achieving a strong economy," using stronger language than last year. The draft also omits previous customary references to improving fiscal health.
A researcher from the Nomura Research Institute warned that if markets develop expectations of government interference in central bank decisions, it could further drive yen weakness and bond price declines, increasing financial market volatility and undermining economic stability.
On Tuesday, Japan's minister for economic revitalization, Minoru Kiuchi, stated that media reports suggesting the Takaichi government is trying to keep rates low and weaken fiscal discipline are "completely inaccurate."
In response, Dayeon Hong, Asia-Pacific strategist at Natixis, said Kiuchi's remarks raise the likelihood of a Bank of Japan (BOJ) rate hike before December, which is crucial for anchoring long-term inflation expectations.
However, given the government's active investment plans, investors still seek more clarity regarding fiscal sustainability, Hong added.
It is worth noting that a 20-year JGB auction held late last month saw its weakest demand since May 2025. As fiscal concerns persist, investors will closely watch another 20-year bond auction scheduled for next week to gauge demand for ultra-long-term debt.
Homin Lee, senior macro strategist at Lombard Odier Singapore Ltd., commented that some investors appear to believe most negative news for JGBs is already priced in.
Nevertheless, Lee maintained a neutral stance on Japanese bonds, citing continued caution due to fiscal policy discussions that remain unresolved.
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