High yield attracts funds to enter, Japan's 40-year government bond auction demand hits highest level since March 2025.

Due to the attraction of higher rates of return, Japan's 40-year government bond auction has received the strongest demand since March 2025. The bid-to-cover ratio for the auction on Wednesday was 2.82, compared to 2.702 at the previous auction, with an average of 2.55 over the past 12 months. After the auction, Japanese bond prices remained relatively stable. Recent speeches by Japanese government officials have emphasized the increased importance of the government pension investment fund investing in domestic financial assets, supporting Japanese government bond prices. The yield on Japan's 40-year government bonds, which reached a historical high of 4.355% in May, is currently hovering around 3.91%. There are signs of strength in Japan's sovereign debt, with the bid-to-cover ratio for last week's 20-year government bond auction reaching a seven-year high. Japanese Finance Minister Koizumi also proposed including government bonds in Japan's tax-exempt individual savings account (NISA) program. "Following the strong performance of the 20-year government bond auction in Japan, the steady issuance of the 40-year government bond indicates that even as medium to long-term yields continue to rise, ultra-long-term bonds are still performing well," said Miki Den, senior interest rate strategist at SMBC Nikko Securities. "Yields on ultra-long-term bonds may remain around current levels." Last month, Japanese insurance companies bought the most ultra-long-term government bonds in three years, further indicating stable demand from major buyers. Meiji Yasuda Life Insurance in Japan stated that it may increase its holdings of Japanese ultra-long-term government bonds by up to 1 trillion yen (approximately $61 billion) in fiscal year 2026. Strategist Mark Cranfield said, "Today's 40-year Japanese government bond auction attracted the strongest demand since March 2025, with the highest yield slightly lower than pre-auction polling data, but still not enough to ensure a strong performance in the secondary market. Investors are quickly seeking yields above 4% as the recent weakening trend of the yen shows no signs of reversal. This makes Japanese government bonds vulnerable to the negative feedback loop of yen depreciation." Some investors are still watching Japan's Prime Minister Takashi Asaka's expansionary fiscal policy, expectations of gradual interest rate hikes by the Bank of Japan, and the still significant interest rate differential. The Asaka government approved an annual economic and fiscal policy plan on Tuesday that emphasizes the independence of the central bank, but the issue of significant reductions in the consumption tax on food remains unresolved. It is worth noting that the escalation of tensions between the US and Iran has pushed oil prices higher, and the yen-dollar exchange rate fell below the 163 level overnight for the first time since 1986. The continued weakening of the yen is raising import costs, further amplifying domestic inflation pressures in Japan. Although the Bank of Japan raised its benchmark interest rate to the highest level since 1995 last month, investors are still concerned that its rate hikes may not be enough to contain inflation. The Bank of Japan will hold a policy meeting next week, with the market widely expecting the bank to maintain its policy rate at 1.0%. The Bank of Japan is in a difficult position balancing between maintaining the exchange rate, stabilizing the fiscal situation, and controlling inflation, with very limited policy space available.