Japanese bonds face another crisis! The demand for 40-year long-term bond auctions hits a 14-year low

Due to concerns over government spending and the trade agreement reached between the U.S. and Japan, demand for Japan's 40-year government bond auction hit its lowest level since 2011. In the latest auction, the bid-to-cover ratio, which measures demand strength, fell to 2.127, down from 2.214 in the previous auction, while bond yields rose to a record 3.375%. Following the announcement of the auction results, Japanese government bond yields rose across the board, with the 40-year yield increasing nearly 10 basis points intraday, and the 10-year yield reaching its highest level since 2008, rising 8 basis points intraday. The backdrop of this auction is complex, as Prime Minister Shigeru Ishiba's ruling coalition failed to secure a majority in the Senate elections. Additionally, according to CCTV News, on July 22, local time, Trump announced that the U.S. and Japan had reached a trade agreement, imposing a 15% import tariff on Japanese goods. These factors have collectively heightened market concerns about Japan's economic outlook. Naoya Hasegawa, chief bond strategist at Okasan Securities, stated, "The auction results were weaker than expected. Reports about Ishiba's resignation and the U.S.-Japan trade agreement have made the market unstable, leading investors to adopt a wait-and-see attitude." Despite the pressure on the bond market, the Nikkei 225 index rose nearly 4%, indicating an improvement in investor sentiment in the stock market, with market reactions showing divergence. Japanese Long Bonds Under Continued Pressure Bloomberg strategists indicated that after the demand for the 40-year government bond auction hit a new low since 2011, long-term Japanese government bonds will continue to face pressure, suggesting that the yield curve may steepen further. Recently, Japanese government bond yields have been trading at multi-year highs, occurring as the Bank of Japan gradually reduces its massive bond purchases. To alleviate volatility in the bond market, the Japanese Ministry of Finance has reduced the issuance of long-term bonds starting this month. Shortly after Trump announced the tariff measures, Bank of Japan Deputy Governor Masayoshi Amamiya stated in a speech that there is currently no need to immediately raise the benchmark interest rate. However, overnight index swaps indicate that the market's expectation of a rate hike before the end of the year has exceeded 80%, up from 59% the previous day. This suggests that market participants believe that, despite the cautious stance of central bank officials, the Bank of Japan may still be forced to take action within the year to address current economic and market pressures, further increasing uncertainty in the bond market. Risk Warning and Disclaimer The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at their own risk