Under electoral uncertainty, Japan's 30-year government bond auction "steadies the market"

Japan’s 30-year government bonds saw strong demand at Thursday’s auction, effectively easing short-term concerns about long-term debt and causing the 30-year bond yield to retreat. The auction result has alleviated tensions in the bond market, coming at a time when a highly anticipated election is approaching.

At Thursday’s auction held by the Ministry of Finance, the bid-to-cover ratio for the 30-year bond rose significantly compared to last month, signaling increased investor willingness to subscribe. Driven by this, the 30-year bond yield at one point fell 5 basis points to 3.585%. Buying sentiment spread across the entire yield curve, with the benchmark 10-year government bond yield dropping 1.5 basis points to 2.23%.

This auction is the second test this week of investor appetite for long-term debt. Previously, Tuesday’s auction of 10-year government bonds showed that concerns over rising fiscal expenditure still lingered among investors. However, the latest 30-year government bond auction data indicates that, despite the fiscal uncertainty brought by the impending snap House of Representatives election, the higher yield levels have succeeded in attracting buyers.

Market analysts pointed out that as political uncertainty fades, more demand may emerge in the future. Major institutional investors such as Meiji Yasuda Life Insurance Co. have stated that Japan’s ultra-long-term government bonds offer attractive investment opportunities and are seeking suitable moments to buy.

Demand Surpasses Expectations

Specific data from this auction show that the bid-to-cover ratio reached 3.64, not only higher than the previous auction’s 3.14, but also above the 12-month average of 3.35. Bloomberg strategist Mark Cranfield noted that Japanese bond traders were relieved by the solid demand—tail-end spread narrowed, and the minimum price was well above expectations, which further boosted market optimism. Notably, over 23% of the bonds were purchased solely by two large domestic companies, which will help facilitate smooth trading in the secondary market.

Kazuya Fujiwara, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities, analyzed that although concerns about fiscal expansion made buying ahead of the election somewhat challenging, the high yield clearly prompted many investors to act. Shoki Omori, chief desk strategist at Mizuho Securities in Tokyo, also considered the auction result “not just satisfactory”—the market has confirmed that with yields at high levels, there is indeed a sufficient amount of real-money demand.

Political and Fiscal Background

The current market backdrop remains complicated. Japanese Prime Minister Sanae Takaichi’s previous plans to cut food sales tax once caused yields last month to surge to historic highs, sparking a wave of selling across global bond markets. While this pressure has eased recently, Japan’s 30-year government bond yield is still close to its highest level since issuance.

This weekend’s snap House of Representatives election will determine the scale of future fiscal expenditure. According to Global Times, the Japanese House of Representatives election is scheduled for February 8 according to the timetable.

Yen and Monetary Policy Considerations

Although bond market sentiment has improved, exchange rate volatility remains an uncertainty for investors. With Sanae Takaichi highlighting the benefits of a weak currency, yen depreciation has once again become a focus. Hedge funds are restarting short yen bets, positioning for possible further weakness in the yen ahead of the election this weekend.

In addition, investors are closely watching how the election results might affect the Bank of Japan’s interest rate hike path. Sanae Takaichi is known for advocating monetary easing, which makes the market wary of her policy inclinations. Nevertheless, minutes from the Bank of Japan’s January meeting show that authorities are closely monitoring the impact of a weak yen on inflation and are increasingly aware of the need for timely rate hikes. These intertwined factors will continue to influence the future direction of Japan’s government bond market.

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