At a sensitive time of "bond market turmoil," the market is focused on today's 30-year Japanese bond auction.

Amid soaring long-term interest rates globally, Japan's 30-year government bond auction on Thursday is being closely watched by the market. A weak result could send shockwaves beyond Japan and potentially spread globally.

The yield on Japan's 30-year government bonds has risen to 4.155%, nearing its all-time high since the bonds were introduced in 1999. Meanwhile, the yield on 10-year Japanese government bonds touched 3% for the first time this week, its highest level in thirty years.

Market concerns about Prime Minister Sanae Takaichi's expansionary fiscal agenda continue to escalate, with record-breaking budget requests from various Japanese government departments for the next fiscal year, further exacerbating investor anxieties about the prospects for government debt.

This auction will also be influenced by additional signals from monetary policy. Bank of Japan Governor Kazuo Ueda hinted this week that a rate hike is possible at this month's policy meeting, stating that the decision will take into account upside risks to prices. His remarks echoed previous comments by US Treasury Secretary Bessant regarding the need for action.

Market participants warn that a poor auction result could put downward pressure on U.S. Treasury bonds, further complicating the U.S. government's efforts to suppress long-term interest rates.

The auction environment is becoming more challenging, with 30-year bonds being more vulnerable than 10-year bonds.

Compared to 10-year Treasury bonds, 30-year bonds are more sensitive to fiscal risks and supply and demand structures.

Against the backdrop of rising global long-term interest rates and soaring oil prices, the 10-year Treasury bond auction earlier this week proceeded smoothly, but the 30-year bond faced a significantly more severe market test.

Barclays strategists Ayao Ehara and others pointed out in a research report:

We expect the overall outcome to be weak to moderate. Yields are high due to last month's rise and are currently not far from their fair value based on long-term factors, but fiscal concerns continue to weigh on them.

According to Prashant Newnaha, senior Asia-Pacific interest rate strategist at TD Securities, the role of Japanese government bonds in the global fixed-income market has undergone a fundamental shift. He said:

Japanese bonds have long been the anchor of the global fixed-income market, but this logic has now reversed. If the sell-off of Japanese bonds continues, it could trigger a repricing of the global fixed-income market.

Newnaha also pointed out that the continued rise in 30-year yields may shift market focus back from monetary policy to fiscal policy—especially given that Japan’s debt-to-GDP ratio is much higher than when the 10-year yield last hit 3%.

Bloomberg market strategist Mark Cranfield also warned that the spread between the yields on 30-year Japanese and US government bonds could fall below 100 basis points.

Potential buying exists, but investors are adopting a wait-and-see approach.

There are also some supporting forces in the market.

Miki Den, senior interest rate strategist at SMBC Nikko Securities, pointed out that the previous two 30-year auctions, both held at a yield of around 4%, recorded relatively high subscription multiples, and recently, life and non-life insurers have accelerated their purchases of ultra-long-term government bonds.

However, Den also emphasized that investors remain hesitant to aggressively extend durations given the uncertainty surrounding when the yield rally will end. She expects the auction results to be between "moderate" and "weak."

This situation means that Thursday's auction will be a crucial indicator of the near-term trend in the global bond market. If the results fall short of expectations, it will not only test domestic fiscal confidence in Japan but could also become a new trigger for rising global borrowing costs.

Risk Warning and DisclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.