(Oct 20): Japan’s 20-year government bond auction Tuesday saw the strongest demand on record as elevated yields underpinned buying.

The bid-to-cover ratio was 5.84, compared with 4.01 at the previous sale, and a 12-month average of 3.73. In another sign of robust investor interest, the tail, or gap between average and lowest-accepted prices, was 0.07, compared with 0.15 last month.

Japan’s super-long yields have recently approached multi-decade highs, as a global bond selloff driven by escalating tensions in the Middle East and higher oil prices added to inflation and fiscal concerns. Earlier this month, the 20-year JGB yield climbed to levels last seen three decades ago, while the 30-year yield reached a record high.

The rise in yields reflects persistent concerns over Japan’s fiscal outlook, as investors are focused on how Prime Minister Sanae Takaichi will fund her planned sales-tax cut on food and soft drinks without further straining the nation’s finances. Takaichi has sought to ease market concerns, saying her administration aims to build a strong economy and achieve fiscal sustainability, while pledging to appropriately manage JGB issuance in next fiscal year’s budget.

Against that backdrop, investors are watching whether elevated yields will draw demand from domestic institutional buyers. Fukoku Mutual Life Insurance Co, the first life insurer to outline its plans for the fiscal second half, said it sees scope to move a bit more from foreign bonds into yen bonds as yields have risen more than expected.

A major test for Japanese bonds will come at the Bank of Japan’s policy meeting next week. While markets widely expect the central bank to keep rates unchanged, with overnight index swaps pricing in about a 6.2% chance of a hike, traders will look to governor Kazuo Ueda’s post-decision press conference for signals on the pace and scope for further tightening. 

Uploaded by Liza Shireen Koshy