Japan’s Five-Year Bond Sale Sees Decent Demand on Higher Yields

Mount Fuji and the Shinjuku skyline at dusk in Tokyo, Japan, on Friday, Feb. 14, 2025. Japan is scheduled to release its fourth-quarter gross domestic product (GDP) figures on Feb. 17. Photographer: Kiyoshi Ota/Bloomberg Photo by Kiyoshi Ota /Bloomberg

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Demand at Japan’s five-year bond sale on Thursday was broadly in line with recent auctions, showing that elevated yields are attracting some buyers.

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The bid-to-cover ratio, a key gauge of interest, rose to 3.43 from June’s offering. It was slightly above the 12-month average of 3.35. Bond futures extended losses slightly after the result and yields on longer tenors remained higher as geopolitical and fiscal risks weighed on the market. 

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Japanese sovereign yields have climbed over the past few weeks as investors fret over Prime Minister Sanae Takaichi’s ambitious spending and investment plans, with the five-year yield close to 2%. Meanwhile, her perceived dovish stance on monetary policy has stoked concerns that the Bank of Japan is raising rates too slowly to control inflation, hurting longer-maturity bonds.

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The auction result was “uneventful,” said Miki Den, a senior rates strategist at SMBC Nikko Securities Inc. The post-sale decline in futures may have been driven by investors switching positions, he said, with some trimming duration to accommodate purchases of new bonds.

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The five-year yield is not far from a peak of 2.04% reached in May, while the benchmark 10-year rate last traded at 2.9%, a fresh high since 1996. 

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In another sign of decent demand at the auction, the gap between average and lowest-accepted prices, narrowed to 0.03 from 0.06 last month. 

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More widely, global bonds are under pressure as oil prices surged after the US struck targets in Iran for a second day, raising inflation risks from energy disruption in the Middle East. Traders are also positioning for more central banks to tighten monetary policy.

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What Bloomberg strategists say:

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The 5-year JGB auction narrowly passed its test with decent metrics helped by a yield just above 2%, but it masks an uncomfortable period for the belly of G-10 yield curves.

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At the core there is an interplay between JGBs, bunds and gilts which have a history of driving G-10 rates higher, with Treasuries adding weight with their own bearish impulse.

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— Mark Cranfield, Markets Live Strategist. Read more on MLIV.

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While Japan’s first auction of 30-year government bonds carrying a 4% coupon earlier this week attracted the strongest demand since 2019, the rally quickly faded as sovereign debt resumed its decline, underscoring persistent concerns over fiscal spending and the BOJ’s pace of rate hikes.

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The government tweaked a reference to monetary policy in the latest draft of its annual policy agenda in what appeared to be an effort to reassure markets that isn’t pressuring the BOJ to delay further rate increases. An earlier draft had been interpreted by some investors as dissuasive of further policy tightening.

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Meanwhile, the yen’s persistent weakness is adding to inflation concerns by raising import costs. The currency is trading near its weakest level against the dollar in four decades, keeping traders on alert for the possibility of another round of official intervention.

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—With assistance from Masahiro Hidaka.

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(Updates with market moves in second paragraphs, analyst’s comments in fourth. Adds chart.)

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