The demand for ultra-long bonds is booming! The 20-year Japanese bond auction subscription ratio hit a five-year high, and high yields attracted an influx of capital

The Zhitong Finance App noticed that the price of Japanese treasury bonds rose. Previously, the 20-year treasury bond auction obtained the best demand ratio in five years, which attracted investors due to rising yields.

The subscription multiplier for Thursday's auction rose to 4.1 from 3.28 last month. The tail spread, another measure of demand, also hit the strongest level since 2023. The yield for each term declined across the board, with the 20-year yield falling 4.5 basis points to 2.9%.

Miki Den, senior interest rate strategist at SMBC Nikko Securities, said, “The results of this auction were very strong due to the rise in yield to a record high, expectations of a reduction in the bond issuance plan for the next fiscal year, and the fall in US bond yields the day before.” He added that Japan's ultra-long-term treasury bond yield may have reached a high point this year.

Japan's Ministry of Finance's last long-term bond auction in 2025 was held after the 30-year bond issue last week also received the strongest demand in many years. Although Japanese Prime Minister Sanae Takaichi recently announced the largest round of additional spending plans since the pandemic, the government is trying to minimize the impact on the ultra-long-term bond market by increasing the issuance of short-term bonds.

However, investors will still pay attention to whether the next fiscal year's budget announcement will further increase bond supply, and whether the Bank of Japan will release any policy signals, indicating that policymakers may consider further interest rate hikes after next week's interest rate hike, which is generally expected by the market.

Strategist Mark Cranfield said that this was the last long-term Japanese treasury bond auction this year. The results were steady. The subscription ratio was the highest this year, and interest spreads narrowed at the end of the year. Japanese bond investors should be able to enjoy the declining yield curve. In particular, the current market generally expects the Bank of Japan to raise interest rates by 25 basis points.

After the media said that Bank of Japan officials were preparing to take action at the December 19 policy meeting (provided that the economy and financial markets were not significantly impacted during the period), market expectations that the Bank of Japan would raise interest rates at this meeting heated up. Governor Kazuo Ueda also recently issued the clearest hint so far, indicating that the Policy Committee may raise interest rates soon. Overnight index swaps currently show a probability of interest rate hikes of around 90%.

The outlook for global bonds has also improved after the Federal Reserve cut interest rates by 25 basis points for the third consecutive meeting on Wednesday and opened the door for further policy relaxation in 2026.

Ken Matsumoto, macro strategist at Credit Agricole Asia Securities, said: “The 20-year bond auction once again shows that the current yield level is attractive enough for investors because the entire yield curve is currently trading near the high level of the cycle.”

He said that the Bank of Japan's austerity policies and fiscal concerns have largely been digested by the market, while adding that “the Federal Reserve's hawkish stance falling short of expectations may provide some support for bonds.”