Bid-to-cover ratio hits record 5.84 times, surpassing previous 4.01 and 12-month average of 3.73

20-year yield falls to 3.710% after auction; 30-year yield also retreats

Investors shift stance as elevated rates seen as buying opportunity despite fiscal concerns

Tokyo, Japan [123RF]
Tokyo, Japan [123RF]

Japan's government bond yields, which have surged to their highest levels in decades, are now drawing investors back rather than driving them away. A record level of demand at an auction of 20-year Japanese government bonds pushed yields lower Tuesday, as more investors began treating the elevated rates as a buying opportunity despite a prolonged selloff driven by inflation fears and fiscal concerns.

According to Bloomberg, the bid-to-cover ratio at Tuesday's (local time) auction of 20-year Japanese government bonds came in at 5.84 times — well above the 4.01 times recorded at the previous auction and the 12-month average of 3.73 times. The bid-to-cover ratio measures the total amount investors bid against the amount on offer; a higher reading signals stronger investment demand.

After the auction results were announced, the 20-year Japanese government bond yield fell as much as 6 basis points (one basis point equals 0.01 percentage point) to 3.710%. The 30-year yield also dropped by as much as 5 basis points. Because bond prices and yields move in opposite directions, the strong buying demand translated directly into lower yields.

Japan's ultra-long bond yields had surged in recent weeks on inflation fears stemming from rising tensions in the Middle East and higher global oil prices, compounded by growing anxiety over the country's fiscal health. The selloff spread across global bond markets. Earlier this month, the 20-year yield climbed to its highest level since the mid-1990s, while the 30-year yield hit an all-time high.

But as yields reached those elevated levels, investor sentiment began to shift. Those who had held off on buying out of concern that bond prices would fall further started paying attention to the higher interest income on offer.

Masahiko Loo, head of fixed income strategy in Tokyo at State Street Investment Management, said Japanese government bonds had "become investable again."

He said investor sentiment was gradually shifting from "don't catch a falling knife" to "earn while you wait," and that this change was becoming more pronounced across global bond markets.

However, uncertainty surrounding Japan's fiscal outlook remains. Investors are watching closely to see how Prime Minister Sanae Takaichi manages additional fiscal pressures as she pursues her campaign pledge to cut the consumption tax on food and beverages. A reduction in tax revenue from the cuts could worsen the country's fiscal position and put renewed upward pressure on bond yields.

Ryutaro Kimura, senior fixed income strategist at BNP Paribas Asset Management, said the strong result at the 20-year bond auction showed that "domestic investor demand is recovering, supported by elevated yield levels and easing fiscal concerns."


sjy@heraldcorp.com