The market breathed a temporary sigh of relief as Japan's ultra-long government bond auction unexpectedly strengthened, with yields plunging more than 10 basis points in response.

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After weeks of intense volatility, Japan's super-long government bond market has seen a brief respite.

On Wednesday, Japan's Ministry of Finance held a 20-year government bond auction, with a bid-to-cover ratio of 4.01, higher than the average for the past 12 months. The auction results exceeded market expectations. Following the news, yields on 20-year Japanese government bonds briefly fell by 10 basis points to 3.68%, while 30-year yields simultaneously fell 11 basis points to 4.045%, and 40-year yields also declined.

Bloomberg strategist Mark Cranfield noted that the auction was solid, with a narrower tail and, more importantly, the two major Japanese government bond underwriters collectively bought about 60% of the issuance. "This is a reassuring signal for investors."

However, market participants generally categorize this rebound as a technical correction rather than a reversal in trend. The underlying pressure on global bond markets hasn't dissipated—ongoing tensions in the Middle East are driving up oil prices and inflation expectations, the yen's continued weakness is heightening domestic inflation risks, and expectations of a Bank of Japan rate hike are also rising.

Yields Retreat from Highs, But Remain Near Historical Peaks

This auction occurred at a tense moment for the market. Less than 24 hours before the auction, the yield on Japan's 20-year government bond briefly touched 3.78%, the highest level since 1996; yields on the 30-year and 40-year bonds also approached their respective historical highs since trading began.

The average winning yield for this auction was 3.711%, also marking a new high since 1996. Although yields subsequently retreated somewhat, they remain at historically high levels, and the overall pressure on the market hasn't fundamentally changed.

Ataru Okumura, Senior Rate Strategist at SMBC Nikko Securities, said: "The 20-year government bond auction delivered strong results. The market may have generally believed that after the sharp rise in yields, bond prices had become too cheap."

Major Underwriters Step In, Auction Results "Exceed Expectations"

Market confidence was boosted by the active participation of key institutional investors in this auction. The two main Japanese government bond underwriters together bought about 60% of the issued volume—this proportion sends a clear signal that large institutions believe current yield levels have value for allocation.

Earlier this month, auctions for 5-year, 10-year, and 30-year government bonds went relatively smoothly, but super-long yields continued to climb afterward, showing that a single auction's boost to the market is limited. Mark Cranfield also admitted, whether this can stabilize the global bond market remains to be seen. "If not, the calm in Japanese government bonds will be short-lived."

Multiple Pressures Intertwined, Too Early to Call a Trend Reversal

Okumura clearly stated this rebound "is most likely just a short-term pullback after a sharp surge in yields, not a trend reversal." He pointed out that the roots of the global bond market's 'bear steepening' lie in the Middle East situation: The Iran issue drags on, oil price risk accumulates, inflation expectations rise, and this suppresses long-term bonds.

Meanwhile, the yen's recent depreciation is intensifying inflationary pressure within Japan and putting rate hike pressure on the Bank of Japan. The interest rate swap market currently prices in about an 80% chance of a Bank of Japan rate hike at its June meeting.

Fiscal concerns are also not to be ignored. Japanese Prime Minister Sanae Takaichi has asked the Ministry of Finance to draft a supplementary budget to cope with the impact of rising commodity prices. Finance Minister Satsuki Katayama said Monday that the government would consider the bond market when studying supplementary budget financing options. According to Reuters, citing an unnamed government official, the government may fund some new spending through additional government bond issuance—this expectation has further fueled market concerns about supply pressures ahead.

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