The Bank of Japan's reduction of bond purchases severely impacts demand, causing Japanese bond yields to jump.

Japanese government bond prices fell sharply after the weakest demand in an auction since 2012, highlighting growing concerns among investors about the level of support from the Bank of Japan for the Japanese bond market as it reduces its massive debt holdings. The Bank of Japan's reduction in bond purchases severely affects Japanese bond demand. According to reports, the average bid-to-cover ratio in Tuesday's Japanese government bond auction decreased from 2.96 last month to 2.5; the bid-to-cover ratio for 20-year Japanese government bonds dropped to the lowest level since August 2012. Another signal of weak demand is the tail spread (the difference between the average winning bid price and the lowest winning bid price) reaching 1.14, the longest since 1987. Following the auction results, the yield on benchmark 10-year Japanese government bonds briefly rose to 1.525%, the highest since the end of March; the yield on 20-year Japanese government bonds surged by about 15 basis points to the highest level since 2000. Although foreign investors bought a record amount of ultra-long-term Japanese government bonds in April, their share in the market remains small. Japanese life insurance companies have not filled this gap, as most of the large life insurance companies are reducing their holdings of domestic bonds. Strategist Mark Cranfield pointed out that despite global funds flowing into Japan long-term bonds, ultra-long-term Japanese government bonds are facing a situation similar to a domestic buyers' strike. Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management, bluntly said, "The results are even worse than I expected." "Due to the risks of fiscal expansion and decreasing liquidity, 30-year and 40-year bonds have already experienced selling, and the deteriorating market conditions have spread to the previously relatively stable 20-year bonds." With Japanese government bond yields rising significantly, the Bank of Japan will meet with representatives of banks and securities companies on Tuesday to understand their views on the progress of quantitative tightening (QT). This auction comes at a time of increased market volatility, partly due to policy actions by US President Trump. Traders are also monitoring whether Moody's downgrade of the US last week will affect Japan's fiscal policy debate. In the Japanese parliament, Shigeru Ishiba expressed disagreement with using Japanese government bonds to fund tax reduction measures, and adopted a cautious stance on increasing fiscal spending at a time of rising national borrowing costs. Ishiba said, "The government has no authority to comment on interest rates, but the reality is that we are facing a world of rising interest rates." "Our fiscal situation is undoubtedly extremely bad, perhaps even worse than Greece."