Demand at Japan’s 30-year government bond auction hits highest level since 2019 as rate hike expectations continue to rise.

Despite ongoing concerns about Japan’s fiscal situation, high yields have attracted investors, and the auction for Japan’s 30-year government bonds saw the strongest demand since 2019. On Thursday, the auction results for Japan’s 30-year long bonds showed a bid-to-cover ratio of 4.04, well above November’s 3.125 and the 12-month average of 3.35. Another strong demand signal was the tail narrowing to 0.09, lower than last month’s 0.27. The tail refers to the gap between the average price and the lowest accepted price in the bond auction—the smaller the indicator, the more concentrated and stable the bids are. Thursday’s Japanese bond auction continued the strong performance of Tuesday’s 10-year bond sale, when attractive yields drew in buyers. The 10-year benchmark bond yield has reached 1.91%, the highest level since 2007. According to Wallstreetcn, with market expectations of a December rate hike by the Bank of Japan surging, Japanese government bond yields have climbed across the board to multi-decade highs. Today’s latest data shows Japan’s 30-year government bond yield up 2.5 basis points to 3.445%, the highest since the bond was introduced in 1999. Bank of Japan Governor Kazuo Ueda’s hawkish comments earlier this week have driven expectations for a rate hike significantly higher. Swap markets now show about an 80% chance of a rate hike at the December 19 policy meeting, with January rate hike odds above 90%, compared to just 56% for December a week ago. (strong probability of BOJ rate hike, over 80%) Strong bond demand is also supported by expectations that the government may reduce the issuance of ultra-long-term bonds, as investors await the Ministry of Finance's concrete plans for next year’s budget. Bond Issuance Plan in Focus Investors are closely watching budget details for the government's next fiscal year, especially plans to further reduce ultra-long bond issuance. According to Bloomberg, Japan’s main dealers last week requested the Ministry of Finance to cut the issuance of such bonds at a meeting. The Ministry of Finance has announced plans to increase short-term bond issuance to finance Prime Minister Sanae Takaichi’s economic stimulus package. The plan will increase the amount issued at 2-year and 5-year bond auctions by 300 billion yen ($1.93 billion), and boost Treasury bill supply by 6.3 trillion yen. The increase in short-term bond supply may create room for a reduction in the issuance of ultra-long-term bonds. Hawkish Signals Ignite Rate Hike Expectations The catalyst for the market’s ramped-up expectations was BOJ Governor Kazuo Ueda’s speech on December 1. He unusually mentioned the upcoming monetary policy meeting on December 18–19 directly, saying a decision would be made “as appropriate.” According to Morgan Stanley analysis, for the central bank governor to explicitly name the next meeting and hint at a decision in a regular speech is a “highly unusual” and strong signal. Ueda said confidence in achieving the economic outlook is “gradually increasing,” and the conditions for normalizing policy are improving. He believes that despite recent negative GDP data, it is only a “temporary” technical correction and the economy continues to recover moderately. In addition, he emphasized that uncertainty around the US economy has decreased, reducing external obstacles for the Bank of Japan to act. Regarding wage growth—a key prerequisite for a rate hike—Ueda said the “initial momentum” for next spring’s wage negotiations is improving. He noted that the pass-through from wage growth to sales prices is continuing, which suggests the underlying inflation trend may be undergoing a persistent shift, paving the way for ending the negative interest rate policy. Risk Warning and Disclaimer The market involves risks, and investment needs to be cautious. This article does not constitute personal investment advice, nor does it take into account the individual user’s special investment objectives, financial situation, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their specific circumstances. Investments made accordingly are at your own risk.