The sale of 40-year bonds for $3.5 billion from Japan had the weakest demand since July 2024

The auction of Japanese government bonds for $3.5 billion for 40 years on Wednesday just broke a ten-month low, recording a bid-to-cover ratio of 2.2, the weakest level since July 2024, according to Financial Times.

That number measures how many bids were made compared to how much debt was offered. For a bond market that usually runs on autopilot, this outcome was a siren.

The sale was part of Japan's scheduled long-term debt issuance, but investor participation quickly declined as domestic life insurers and long-term buyers pulled back. The drop is being described by traders as a 'buyer strike.'

The weak participation followed a volatile day in the market. On Tuesday, 40-year bond yields dropped to 3.29%, reaching a three-week low, after reports that the finance ministry had contacted investors and brokers.

That led to speculation that the government might start cutting back on how much super-long-term debt it sells. But by the morning of the auction, that mood had changed. Yields rose again to 3.32%, and after the result was announced, they rose further to 3.37%.

The 20-year auction raised concerns about longer-term bonds

Last week's 20-year bond auction 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 rose to 3.185%, and 40-year bonds briefly reached 3.675%.

All of this fed growing fears that Japan's super-long-term debt market is no longer functioning as it used to. Barclays analysts said the poor performance confirmed a fragile balance between supply and demand, especially as interest from the private sector continues to fade.

Prime Minister Shigeru Ishiba added even more pressure last week by comparing Japan's fiscal position to that of Greece, a name that no one in Tokyo wants to be mentioned in the same sentence. Japan's debt-to-GDP ratio has been above 200% since 2020. That number has not moved. The weight of government indebtedness has now encountered a shift in investor behavior, and it's making everyone nervous.

Officials are monitoring but are not giving 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-term yields, focusing on how it could affect the rest of the curve, especially short-term bonds. Traders interpret those comments as a wait-and-see — not exactly comforting given how quickly yields have moved.

Stephen Spratt, a strategist at Société Générale, said the results were 'soft, but in line' with what the market expected. 'Headlines will say the lowest since last July, but in the context of a broad shock in yields, the outcome wasn't too shocking,' he said.

However, none of this is happening in a vacuum. Bond markets in other wealthy countries have also been selling as investors wake up to the reality of more spending, more debt, and not enough answers. But in Japan, the market issues are complex.

The country is still trying to emerge from an era of ultra-loose monetary policy. That exit has been dragging since the central bank began signaling cuts in bond purchases.

In June 2024, the BoJ announced it would begin reducing its JGB purchases at a pace of ¥400 billion ($2.75 billion) per quarter. That reduction is scheduled to continue from August 2024 to March 2026. The problem now is that as public buying decreases, demand from the private sector has not increased. And with life insurers and national funds on the sidelines, gaps are appearing... quickly.

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