Japan's 30-year bond sale draws weaker demand as yields fall back

What happened

Japan's Ministry of Finance sold 30-year government bonds on 10 November at an average yield of 3.847%, about 26 basis points lower than at the previous sale in October. Investors bid for 3.36 times the amount on offer, the bid-to-cover ratio, down from 3.88 at the last auction and below the 12-month average of 3.6. The gap between the average and the lowest accepted price, the "tail", was the widest since June, according to Bloomberg. The 30-year yield rose to about 3.87% after the sale.

Why demand was weaker

Bond prices and yields move in opposite directions (see why bond prices fall when yields rise). Last week, as AI-related shares plunged after the US midterm elections, investors bought government bonds around the world as a safe place for their money. That pushed Japanese yields down sharply from this year's highs, the highest in decades.

So this auction asked buyers to lock in a lower income for 30 years than a month ago. Some were unwilling. Ryutaro Kimura of BNP Paribas Asset Management told Bloomberg that hedge funds which had bet on short-term yields rising faster than long-term ones, on the expectation of Bank of Japan rate rises, lost money when long yields fell, and may need time before buying again.

The bigger picture

Two forces shape demand for Japan's longest bonds. First, the Bank of Japan: a summary of opinions from its October meeting showed many board members saw the need for a rate rise soon, and swaps price about a 77% chance of one in December. Second, the government's finances: Prime Minister Sanae Takaichi wants to support households while reassuring investors about debt, and the government plans to scale back fuel subsidies from December. Japan's debt is the highest among large rich economies, which is why buyers watch every auction (see how government debt grows or shrinks).

Still, there were buyers: Japanese life insurers have said they plan to keep or increase purchases of domestic bonds, and Bloomberg's strategist judged demand sufficient to avoid a messy outcome.

Where it sits in the chain

This is Link 2, bonds: the price a government pays to borrow for 30 years depends on expected rates, the safe-haven flows of the moment and how comfortable investors are with its debt.

What to watch

• The five-year bond sale on 12 November.
• The Bank of Japan's December decision.
• The yen, near 158 per dollar, which a rate rise would tend to support.