Staff Reporter

Yields on long-dated Japanese government bonds reached all-time highs on Wednesday, following a disappointing auction that raised doubts about upcoming debt sales.

Super-long yields have been climbing, influenced by rising U.S. Treasury yields and growing worries about potential fiscal stimulus ahead of Japan’s upper house election in July.

This bond selloff poses a challenge for the Bank of Japan, which is attempting to reduce its debt purchases and normalize monetary policy. Increasing long-term borrowing costs also signal trouble for Japan’s heavily indebted government.

The Ministry of Finance’s recent sale of 20-year JGBs saw a lack of buyers, resulting in the worst auction outcome since 2012, according to analysts.

“For demand for super-long bonds to recover, the market needs reassurance about a reduction in new bond issuance, which is technically possible within this fiscal year,” said Naoya Hasegawa, chief bond strategist at Okasan Securities.

“Sentiment is likely to remain subdued ahead of next week’s auction for 30-year bonds and the following week’s auction for 40-year bonds.”

The yield on 20-year JGBs dipped 2 basis points to 2.535% after reaching 2.575%, the highest level since October 2000. The 30-year yield climbed to a new record of 3.185%, while the 40-year yield hit an all-time peak of 3.635%.

JGBs have faced pressure throughout the year, with a significant selloff in March following a drop in German bunds. Recently, several political parties have called for consumption tax cuts, which Prime Minister Shigeru Ishiba has resisted.

Above-target inflation and the potential for increased fiscal stimulus are putting upward pressure on yields. However, a sustained exodus from JGBs seems unlikely, according to Naomi Fink, Chief Global Strategist at Nikko Asset Management.

“This situation underscores the need for the Japanese government to prioritize returning to primary balance,” she noted.

Rising inflation may lead to fewer bond purchases by the BOJ, leaving the market vulnerable to demand from more price-sensitive buyers, according to Sally Auld, chief economist at NAB.

“It feels like a perfect storm for the JGB market at a time when investors are more alert and concerned about the long end of yield curves and rising term premiums,” she stated.

The benchmark 10-year JGB yield remained steady at 1.515%, while the two-year yield slipped 1 basis point to 0.715%.