Strong Demand for Japan's 40-Year Bond Auction as Bid-to-Cover Ratio Hits Highest Since 2020

Ministry of Finance Announces Results of 40-Year Government Bond Auction

The bid-to-cover ratio at Japan's 40-year government bond auction has reached the highest level since 2020. Surging demand from investors is being attributed to rising yields on Japanese government bonds (JGBs), fueled by expectations of an additional interest rate hike by the Bank of Japan (BOJ).

According to Japan's Ministry of Finance on September 29, the total amount of bids placed at today's 40-year JGB auction was 928 billion yen, with 299.7 billion yen actually allotted. The bid-to-cover ratio, which is calculated by dividing the bid amount by the amount allotted, stood at approximately 3.1 times—higher than both the previous auction's 2.82 times and the recent 12-month average of 2.67 times. Bloomberg reported that this is the highest level since 2020. A higher bid-to-cover ratio indicates stronger investor demand for JGBs, as it reflects the amount investors want to invest compared to what is actually available.

The highest yield allotted at this auction reached 4.125%. After the auction, the yield of 40-year JGBs traded in the secondary market stood at 4.23%, while JGB futures continued their upward trend.

According to Bloomberg, the elevated yields on JGBs have stimulated investor demand. Bloomberg further explained, "Japan's 40-year government bond has been favored by life insurance companies that need to make long-term insurance payouts. This auction will serve as a key indicator of whether high yields can draw these investors back in."

The background for the rise in JGB yields includes expectations for additional rate hikes from the BOJ. In the market, growing concerns that the BOJ is lagging behind inflation have led to mounting speculation that the pace of future interest rate hikes could accelerate.

On September 18, at its monetary policy meeting, the BOJ raised its key interest rate by 0.25 percentage points. However, Governor Kazuo Ueda declined to comment on the pace of future rate increases at the subsequent press conference. In an interview with Bloomberg, former BOJ Executive Director Kazuo Monma, who previously oversaw monetary policy, commented that "the BOJ could raise the key interest rate again in October, marking two consecutive months of increases."

Concerns regarding the Japanese government's expanded fiscal spending are also contributing to the rise in ultra-long-term JGB yields. Increased government spending can result in a larger supply of government bonds and greater fiscal burdens. According to Bloomberg, the Japanese government is reportedly considering raising its medium-term defense expenditure target to 3.5% of gross domestic product (GDP).

In addition to these domestic factors, external influences affecting JGBs exist as well. A broad sell-off in global bond markets, centered on U.S. Treasuries, is exerting upward pressure on JGB yields. Rising international oil prices, fueling concerns about inflation, have also heightened the likelihood of additional interest rate hikes by the U.S. Federal Reserve (Fed)—a factor that, according to Bloomberg, has impacted JGBs.

Market attention is now shifting to Japan's two-year government bond auction, scheduled for September 30. As expectations for further BOJ rate hikes spread, the yield on the two-year JGB has climbed from around 1.7% at the end of last month to near 2% recently. Bloomberg stated, "The two-year JGB is among those most sensitive to BOJ monetary policy expectations. This auction will be closely watched as a gauge of market anticipation for future BOJ rate hikes."

This content was produced with the assistance of AI translation services.