Super long bond demand is surging! The subscription multiple of the 20-year bonds auction has hit a five-year high, with high yields attracting a flood of capital.

Noticeably, Japanese government bond prices rose, with the 20-year government bond auction receiving the highest demand ratio in five years, as the increase in yields attracted investors. The subscription multiple for the auction held on Thursday increased from 3.28 last month to 4.1. Another indicator of demand, the tail spread, also reached its strongest level since 2023. Yields for all maturities declined, with the 20-year yield dropping by 4.5 basis points to 2.9%. Miki Den, Senior Rate Strategist at SMBC Nikko Securities, said, "Due to the increase in yields to historical highs, expectations for a reduction in issuance plans for the next fiscal year, and the decrease in U.S. bond yields the previous day, the results of this auction were very strong." He added that the highest point for long-term Japanese government bond yields this year may have already occurred. This auction of the last long-term bonds for 2025 by the Japanese Ministry of Finance took place after the issuance of 30-year bonds last week also received the strongest demand in years. Although Japanese Prime Minister Nao Sugihara recently announced the largest round of additional spending since the pandemic, the government is attempting to minimize the impact on the ultra-long-term bond market by increasing short-term bond issuance. However, investors will continue to pay attention to whether the next fiscal year's budget announcement will further increase bond supply and whether the Bank of Japan will release any policy signals indicating that decision-makers may consider further rate hikes after the widely expected rate hike next week. Strategist Mark Cranfield stated that this was the last long-term Japanese government bond auction of the year, with strong results, the subscription multiple reaching a high for the year, and the tail spread narrowing. Japanese bond investors are expected to benefit from the declining yield curve, especially as the market generally expects the Bank of Japan to raise rates by 25 basis points. Market expectations for a rate hike at the December 19 policy meeting have increased following reports that Bank of Japan officials are prepared to take action at the meeting (provided there are no major economic or market disruptions during that time). Governor Haruhiko Kuroda has recently issued the clearest indication yet that the policy committee may soon raise rates. Overnight index swaps currently indicate a probability of around 90% for a rate hike. After the Federal Reserve cut rates by 25 basis points at its third consecutive meeting on Wednesday, and opened the door for further policy easing in 2026, the global bond outlook has improved. Ken Matsumoto, Macro Strategist at Crdit Agricole CIB Asia Securities, stated, "The 20-year Japanese bond auction once again highlights that the current yield levels are attractive to investors, as the entire yield curve is currently trading near cyclical highs." He noted that market digestion of the Bank of Japan's tightening policy and fiscal concerns has largely been completed, while adding, "The Fed's less hawkish stance than expected may provide some support for bonds."