Japanese bonds rally as 40-year auction shows resilient demand before election

TOKYO: Japanese government bonds (JGBs) rallied on Wednesday, as yields hovering near record highs attracted strong demand at an auction of super-long-term debt.

The yield on the 40-year JGB, which last week touched an all-time high of 4.205%, fell 3.5 basis points (bps) to 3.9% following a sale of the securities.

The benchmark 10-year bond yield fell 3.5 bps to 2.250%.

Yields move inversely to bond prices. Japanese bond markets have been on edge on expectations a snap lower house election on February 8 may usher in more debt-funded stimulus.

Prime Minister Sanae Takaichi has pledged a two-year suspension of the sales tax on food, which accounts for around 5 trillion yen ($32.78 billion) in revenue a year, without saying how she will make up for the shortfall.

On Wednesday, the Ministry of Finance sold about 400 billion yen in 40-year bonds, Japan’s longest tenor.

The auction had a bid-to-cover ratio, a measure of demand, of 2.76, the highest since a sale in March 2025.

The auction “was strong across supply-demand, price, and follow-through,” said Shoki Omori, chief desk strategist at Mizuho Securities.

“This outcome supports a constructive backdrop for the upcoming 30-year auction.”

Long-term yields have climbed sharply since early November, hitting successive records, on concerns over the size of Takaichi’s spending plan.

Meanwhile, short-term yields have faced upward pressure after the Bank of Japan raised policy rates in December and signalled that more hikes were on the way.

Minutes of the BOJ’s December meeting released on Monday showed that policymakers agreed on the need to keep raising rates, with some emphasising the role of a weak yen on underlying inflation.

The two-year yield, the most sensitive to central bank policy rates, decreased 2.5 bps to 1.25%.

The five-year yield fell 2.5 bps to 1.685%.