Can the volatility in the long-term bond market be calmed down? The market is focusing on the 30-year Japanese bond auction.

The 30-year Japanese government bond auction held in Japan on Thursday is seen as a test for policymakers to successfully calm the bond market turmoil. This turmoil has led to historically high yields for super-long-term bonds in the country in May. Yields on JGBs have fallen from their peak, thanks to adjustments made by the Japanese Ministry of Finance in bond issuance strategy, reducing the issuance of super-long-term bonds, and the Bank of Japan slowing down the pace of reducing bond purchases. Recently, the issuance of short-term bonds has also been relatively smooth. However, the market remains vigilant, especially for the 30-year bonds. Globally, super-long-term bonds are under strict scrutiny as deficits deepen for various governments, prompting investors to demand higher yields to justify the risks of holding these bonds. Overnight, yields on UK long-term government bonds surged by over 20 basis points, as speculation about the future of UK Chancellor of the Exchequer Rishi Sunak reignited concerns about the UK's fiscal situation. Yields on 30-year US Treasury bonds briefly rose by 8 basis points. In early trading on Thursday, JGB yields saw a slight increase. The weakening demand for these bonds in Japan also reflects traditional buyers such as life insurance companies reducing purchases, and the Bank of Japan attempting to gradually exit the market after becoming a major holder. Australian authorities are considering reducing the issuance of super-long-term bonds, and US Treasury Secretary Janet Yellen has stated that increasing the issuance of long-term bonds is pointless as yields have risen. Ansh Gandhi, Fixed Income Strategist at Futures First Info Services, said, "The Bank of Japan and the Ministry of Finance should be commended for navigating a complex situation." He added that the successful sales of 10-year and 20-year bonds recently bode well for the 30-year bond issuance. The auction results will be announced at 12:35 pm Tokyo time, with the market closely watching the bid-to-cover ratio, which reflects the level of investor demand. In the last 30-year bond auction held in early June, this ratio was 2.92. Over the past year, the average ratio has been 3.33. Another key indicator to watch is the tail, which measures the difference between the average price and the lowest accepted price. After the surge in JGB yields in May, yields on US, UK, and German government bonds have also risen. The successful sale of benchmark 10-year government bonds on Tuesday provided some support to the market, but traders remain cautious. Seiji Maruyama, Chief Investment Officer at PGIM Japan Co., said, "The severe lack of liquidity in the super-long-term bond market may have peaked. We do not expect the turbulence seen after the May auction to be repeated." Maruyama added, "The auction results are still uncertain, and it's possible that the outcome may be lackluster, but it is worth noting that despite the recent weak results from super-long-term bond auctions, the market has not collapsed. This indicates that the supply-demand mismatch is gradually improving." The Japanese Ministry of Finance has decided to reduce the issuance size of 20-year, 30-year, and 40-year bonds by 3.2 trillion yen (about 220 billion US dollars) by the end of March 2026. Gandhi of Futures First stated that if there are signs that Thursday's auction is not very successful, policymakers may need to take further action. He pointed out that the Bank of Japan may engage in verbal intervention or even reconsider the pace of quantitative tightening. As investors focus on the financing situation in the Japanese government bond market, Japan is preparing for a national election this month, where political parties may make costly spending commitments. Prime Minister Shizo Abe has listed raising wages and achieving a 1 trillion yen economic goal as key campaign promises. Ken Matsumoto, Macro Strategist at Crdit Agricole CIB Tokyo, stated, "Uncertainty surrounding the Japanese Senate election may dampen demand for this auction. Depending on the election results, there could be a significant change in the Japanese government's fiscal policy stance."