Japan’s $3.5B 40-Year Bond Flop: Weakest Demand in Nearly a Year

Tokyo’s latest long-term debt offering just face-planted—investors shrugged like they’d spotted a typo in the fine print. The 40-year bond sale scraped bottom with demand levels not seen since July 2024, proving even yield-starved institutions have their limits.

Who could’ve predicted that locking cash away until 2065 wouldn’t spark a frenzy? Maybe the same geniuses who thought negative rates were a permanent fixture. Bond math strikes again—where ‘long-term’ just means ‘extra time to regret.’

20-year auction triggered concern over longer-dated bonds

Last week’s auction of 20-year bonds triggered this round of anxiety. Demand was weak enough to push yields on that debt to 2.6%, a level not seen in decades. The damage didn’t stop there. Yields on 30-year bonds climbed to 3.185%, and 40-year bonds briefly hit 3.675%.

All of this fueled growing fears that Japan’s super-long debt market is no longer functioning the way it used to. Barclays analysts said the poor showing confirmed a fragile supply-demand balance, especially as private-sector interest continues to vanish.

Prime Minister Shigeru Ishiba added even more pressure last week by comparing Japan’s fiscal position to Greece — a name nobody in Tokyo wants to be in the same sentence with. Japan’s debt-to-GDP ratio has been above 200% since 2020. That number hasn’t budged. The weight of government borrowing has now collided with a change in investor behavior, and it’s making everyone nervous.

Officials monitor but give no clear signals

Before the auction, Finance Minister Katsunobu Kato told reporters he was “closely monitoring” developments in the bond market.

At the same time, Kazuo Ueda, who heads the Bank of Japan, said the central bank is watching volatility in super-long yields, with a focus on how it might affect the rest of the curve, especially short-term bonds. Traders are reading those comments as wait-and-see — not exactly comforting given how fast yields have been moving.

Stephen Spratt, a strategist at Société Générale, said the results were “soft, but in line” with what the market was expecting. “The headlines will say lowest since last July, but in the context of a broad shock in yields, the result wasn’t too shocking,” he said.

Still, none of this is happening in a vacuum. Bond markets in other rich countries have also been selling off as investors wake up to the reality of more spending, more borrowing, and not enough answers. But in Japan, the market’s issues are layered.

The country is still trying to pull itself out of an ultra-loose monetary policy era. That exit has been dragging since the central bank started signaling cuts to bond buying.

In June 2024, the BoJ announced it WOULD start reducing its JGB purchases at a rate of ¥400 billion ($2.75 billion) per quarter. That reduction is planned to continue from August 2024 through March 2026. The problem now is that as public buying scales down, private-sector demand hasn’t stepped up. And with life insurers and domestic funds staying on the sidelines, the gaps are showing… fast.

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