Japan's 30-year government bond auction was lukewarm; when will the global long-term bond selloff end?
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This week, global long-term bonds continued to come under pressure, with long-term yields in developed markets such as the US, UK, Japan, and France all reaching long-term highs. The yield on 30-year UK government bonds rose to its highest level since 1998 on Tuesday, the yield on US 30-year Treasury bonds briefly touched 5%, and the latest 30-year Japanese government bond auction also showed lackluster performance.
On Thursday, the bid-to-cover ratio for the Japanese 30-year government bond auction was 3.31, slightly below the 12-month average of 3.38, basically in line with the 12-month average, providing a temporary respite for the global bond market recently hit by intensified government spending.
This auction result triggered buying across the entire maturity spectrum of Japanese government bonds, with long-term bond yields retreating from multi-decade highs. However, analysts warn that this is only a tactical relief and not a trend reversal.
Countries are generally facing high and rising fiscal deficits, implying the dual threat of increased bond issuance and higher borrowing costs in the future. This drives long-term bond investors to demand higher yields. Ed Al-Hussainy from Columbia Threadneedle pointed out that inflation concerns are not the main driver of the rise in long-term yields; the 30-year breakeven inflation rate remains stable, with the increases coming from real rates.
Regarding the result of this JGB auction, analyst Spencer Hakimian expects there will be more global bond sell-offs tonight, and global yields will rise further. However, Charu Chanana, Chief Investment Strategist at Saxo Markets, noted that combined with the decline in US job openings data, this provides modest relief to the recently battered global bond market.
Auction Results Ease Market Worries
The yield on Japan’s 30-year government bond fell 2 basis points to 3.26%, moving further away from the record high of 3.285% reached on Wednesday. The benchmark 10-year yield dropped 2.5 basis points to 1.605%.
Wee Khoon Chong, Senior Market Strategist for Asia-Pacific at BNY Mellon, said:
Considering "overall worries about insufficient demand and upward pressure on global long-term bond yields," this auction result was "not bad at all." He believes the 10-year and 30-year auctions so far in September provide a good foundation for the rest of the month.
Although the auction results improved market sentiment, indicators still show some caution. Thursday’s tail (the gap between the average price and the lowest accepted price) widened slightly to 0.18 from 0.15 at the previous auction.
Fiscal Concerns Drive Global Bond Selloff
The synchronized decline in long-term bonds in developed markets reflects the fiscal challenges faced by all these countries. Each faces high and rising fiscal deficits, meaning more bonds will need to be issued in the future and higher borrowing costs will be borne.
Northern Trust analyst Antulio Bomfim said:
I really think this is not just a cyclical phenomenon, but reflects more persistent concerns over deficits. The problem is worsening because many central banks are normalizing their balance sheets, so their purchases of long-term government bonds are decreasing.
Thomas Mathews from Capital Economics pointed out that pension funds and life insurance companies have not been able to fill this gap in the same way. This suggests that volatility in the long-term bond market may remain high, and as more price-sensitive buyers become active in the bond market, ultra-long bond yields may rise further.
Political factors remain a key source of instability. Traders are worried that the ruling LDP may decide to hold an early party leadership election at its September 8 meeting, which could lead to Prime Minister Shigeru Ishiba being replaced by a leader who supports more fiscal expansion.
This uncertainty could also complicate the Bank of Japan’s next steps. JPMorgan strategists said in a report on Wednesday that if a leadership election is held, the central bank might hesitate to provide any indication about the path of monetary policy at its September 18–19 meeting.
Homin Lee, Senior Macro Strategist at Lombard Odier in Singapore, said: "Volatility will persist until the LDP leadership election and any subsequent discussions with the opposition about a supplementary budget become clearer." Traders have already cut expectations of a near-term rate hike; overnight index swaps are now pricing less than a 40% chance of action at the October policy meeting, down from over 50% a week ago.
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