Japan's 10-year bond auction eases market jitters ahead of key 30-year sale

Ahead of the 30-year bond auction later this week, investor sentiment received a lift following a relatively steady sale of Japan’s sale of 10-year government notes.

According to a Bloomberg report, the bid-to-cover ratio was at 3.51, higher than the 12-month average of 3.14, as expectations for rate hikes by the central bank receded and upward pressure on longer-maturity yields eased. As a result, the ten-year bonds rallied.

Japan’s sovereign debt auctions have drawn heightened attention since late May, following a weak 20-year bond auction that pushed super-long yields to record highs. The surge in yields rippled through global debt markets, where investors are increasingly wary of growing government deficits. In response, Japan’s Ministry of Finance has adjusted its bond issuance plans starting this month.

“Market sentiment seems to be good for JGBs entering a new quarter, especially after the meeting between the MOF and primary dealers late last month resulted in a reduction of super-long bond issuance amounts,” Anmol Agrawal, a strategist at Intouch Capital Markets Pte, told Bloomberg. “The litmus test for markets will now be the upcoming 30-year bond auction on Thursday.”

The 10-year Japanese government bond (JGB) yield dropped 4 basis points to 1.39% following the auction results, while bond futures climbed 23 ticks to 139.25.

As a benchmark for Japan’s long-term lending rates, the 10-year note plays a crucial role in shaping mortgage rates and corporate borrowing costs across the economy.

The bond auction was “very strong,” said Miki Den, a senior rates strategist at SMBC Nikko Securities Inc told Bloomberg. Many investors may have judged that the Bank of Japan cannot raise interest rates until there’s a recovery in sentiment in the automobile sector, which dropped significantly in the Tankan survey, he said.

The sale comes after results from a confidence survey among Japan’s largest manufacturers edged up in June. However, the lack of a meaningful decline in 30- and 40-year yields suggests that caution surrounding super-long bonds remains, as the market still has to navigate a 30-year bond sale on Thursday.

JGB futures are firmer after Tuesday’s 10-year auction produced solid metrics, but the good mood will struggle to sustain after the strong Tankan report that came earlier.

The data opened the door for BOJ Governor Ueda to lean hawkish when he speaks later today at Sintra in Portugal. With a tricky 30-year debt sale still to come on Thursday, JGB traders are likely to curb their enthusiasm.

— Mark Cranfield, MLIV Strategist

The bid-to-cover ratio at Tuesday’s auction came in slightly below the 3.66 recorded at last month’s sale of the same tenor. The tail—the difference between the average and lowest-accepted prices—widened to 0.03 from 0.01 previously, indicating a modest dip in bidding strength.

To help stabilise demand for Japanese government bonds, the Ministry of Finance announced adjustments to its issuance plans in June. While the amount of 10-year bonds remains unchanged, reflecting consistent investor interest, the ministry will scale back issuance of 20-, 30-, and 40-year bonds starting this month.

Separately, the Bank of Japan said last month it would slow the pace of its market withdrawal beginning next year, aiming to maintain financial stability.

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