Another weak auction for Japanese bonds has prompted traders to scale back on recent yen-long trades.
The price of the USD/JPY was threatening to move to the April lows but has now rallied from support at 142.40. It could serve as a base for a dollar rally, with a target of 149.00 if sentiment remains positive.
A Japanese auction of $3.5 billion in 40-year government bonds saw the weakest level of demand since July 2024. Japanese bond sales have been a highly predictable event, but the recent weak sales are a cause for alarm.
The Wednesday sale was part of Japan’s planned long-term debt issuance, but investor participation was weak as domestic life insurers and long-end buyers pulled away. Some traders are now referring to the event as a “buyers’ strike”. Yields on 40-year bonds fell to a three-week low of 3.29% on reports that the finance ministry had been approaching investors and brokers.
Barclays analysts noted that the recent sales underscore a fragile supply-demand balance while private-sector interest continues to wane. The situation has brought some attention after Prime Minister Shigeru Ishiba compared his country’s economy to the previous Greek debt crisis.
Before the latest bond auction, Finance Minister Katsunobu Kato stated that he was “closely monitoring” developments in the bond market. Bank of Japan Governor Kazuo Ueda said that the central bank is monitoring recent volatility, with a focus on how it may impact short-term bonds.
Stephen Spratt at Societe Generale said the results were “soft, but in line” with what the market was looking for. “The headlines will say lowest since last July, but in the context of a broad shock in yields, the result wasn’t too shocking,” he added.
The situation remains worth watching as governments worldwide begin to run out of room for endless spending and debt in an inflationary environment.
Japan’s government bonds are the “canary in the global duration coalmine,” Goldman Sachs analysts said last week.
