The demand for Japan's 30-year government bond auction is surging, hitting a four-year high! With a yield exceeding 3.4%, Nomura makes a large-scale purchase.

The auction of 30-year Japanese government bonds saw the strongest demand since 2019, indicating that investors are finally re-entering the market as yields rise, providing some relief to the jittery market anticipating interest rate hikes. The bid-to-cover ratio for the 30-year government bonds issued by the Ministry of Finance soared to 4.04, surpassing the previous auction levels and easily exceeding the average of the past year, with the yield on the 30-year bonds falling 3 basis points to 3.39% after the auction. Thursday's government bond auction followed a robust 10-year government bond auction on Tuesday, which saw attractive yield levels and attracted buyers. Overall, these results provided some comfort to the market. In the preceding weeks, expectations of a rate hike by the Bank of Japan and fiscal concerns reignited, triggering a significant sell-off and pushing yields across maturities to multi-year highs. Ryutaro Kimura, Senior Fixed Income Strategist at Amundi Asset Management, said: "The auction results were surprisingly strong, likely because many investors believe that increasing exposure to ultra-long bonds is acceptable when yields exceed 3.4%. The upward pressure on ultra-long bond yields may temporarily ease." The bid-to-cover ratio for this auction rose from 3.125 in the November auction. Another sign of steady investor demand is the "tail" of this auction (the difference between the average accepted price and the lowest accepted price), which was 0.09 compared to 0.27 in the previous month. Analyst Mark Cranfield said Japanese government bond investors seem to have found a yield level they like for the 30-year bonds, with a bid-to-cover ratio of 4.04 in Thursday's auction. This is the highest level of demand since 2019, and the lowest clearing price significantly exceeded expectations, signaling positively. Moreover, Nomura emerged as the largest buyer, which is usually a sign of long-term investor participation. Yields on other Japanese government bond maturities have continued to rise, especially for short-term bonds more sensitive to changes in monetary policy. Bank of Japan Governor Haruhiko Kurodatenkov made slightly hawkish comments earlier this week, raising expectations for a rate hike in December. He said the Bank of Japan would weigh the pros and cons of a rate hike and take appropriate action, adding that even with a rate hike, financial conditions will remain accommodative. The benchmark 10-year Japanese government bond yield rose by 3.5 basis points to 1.925%, while the 5-year government bond yield edged up to 1.40%. The swap market currently implies an 80% likelihood of a rate hike at the Bank of Japan's policy meeting on December 19, and over 90% likelihood of a rate hike in January. Just a week ago, the market's expectations for a rate hike in December were only 56%. Ken Matsumoto, Macro Strategist at Credit Agricole CIB Securities Asia Limited, said the current higher yield levels make it easier for life insurers to buy Japanese bonds. He said that considering the expected rate hike in December, the next rate hike may be far off, which "should be favorable for bonds." Investors are also awaiting details of the government's budget for the next fiscal year, particularly any plans to further reduce issuance of ultra-long bonds. At a meeting last week, major dealers in Japan called on the Ministry of Finance to cut sales of such bonds. In Japan, the government has announced plans to increase issuance of short-term bonds to help fund Prime Minister Yukichi's economic plan, with an additional 300 billion yen to be added to the issuance plan for two- and five-year government bonds, and an increase of 6.3 trillion yen in treasury bill supply. However, Kimura of Amundi Asset Management said that if overall issuance increases and the desired reduction in supply of ultra-long Japanese government bonds by investors is not achieved, the yield curve may steepen again. Investors will now turn their attention to the 5-year and 20-year government bond auctions next week, as well as the Federal Reserve's policy decision and its impact on the Bank of Japan's policy path.