Japan’s Long-Term Bonds Pass a Key Test as 10-Year JGB Auction Sees Strongest Demand in Two Years

TradingKey - Amid rising expectations of a Bank of Japan rate hike and lingering concerns over fiscal deficits, Tuesday’s 10-year Japanese government bond (JGB) auction was seen as a critical stress test for the health of demand in Japan’s bond market. Fortunately, the auction results came in surprisingly strong — with the bid-to-cover ratio soaring to its highest level in two years, even as the BOJ’s deputy governor reaffirmed the prospect of higher rates.

On Tuesday, September 2, Japan’s 10-year JGB auction showed a bid-to-cover ratio of 3.92, up from 3.06 last month and above the 12-month average — the highest since October 2023.

The robust demand eased market fears about Japan’s long-term debt market. 10-year JGB yields fell sharply, dropping below 1.60% to 1.598%, after briefly rising to 1.643% the previous day — the highest level since July 2008.

10-Year Japanese Government Bond Yield Chart, Source: TradingView

Ahead of the auction, Nomura Securities strategists noted that investors had shown weak appetite in recent JGB auctions and might approach this one with caution.

With the BOJ signaling further rate hikes and a reduction in its massive bond-buying program, alongside fiscal risks from political uncertainty, Japanese bond yields have been hitting multi-year or even record highs. Analysts warned these factors would continue to push yields higher, making investors reluctant to buy at current levels.

Clearly, Tuesday’s auction delivered an unexpectedly strong result. A portfolio manager at Meiji Yasuda Asset Management said:

“The results were strong. Given the high yield level at around 1.6% and the large-scale buying, bonds with maturities of 10 years or less are being bought, especially since the market had been cautious.”

On the same day, BOJ Deputy Governor Ryozo Himino reiterated in a speech that if economic activity and inflation continue to improve, the central bank will continue raising policy rates.

However, unlike his clear hawkish signal in January, Himino’s remarks this time were seen as routine and non-committal — failing to boost bets on near-term rate hikes. Analysts viewed the comments as relatively neutral, confirming that the next move is still likely a hike, but timing remains uncertain.

AXA Investment Managers strategists said:

“The less hawkish-than-expected text of Deputy Governor Himino’s speech released in the morning led to a strong 10-year bid result, as investors’ expectations for an early additional rate hike receded.”

Bloomberg analysts noted that the buying list was led by MUFJ-MS, typically indicating participation from long-term investors.

Next, investors will turn to Thursday’s 30-year JGB auction to further assess the resilience of demand for Japan’s long-term debt. Earlier, the Ministry of Finance consulted markets on potentially reducing long-term bond issuance — a move that could help calm bond market volatility.