The most important economic indicator Wednesday isn't about inflation, the labor market or consumer sentiment. Instead, it was a bond auction in Japan, and bond markets around the globe carefully eyed the results.
An auction of 40-year Japanese government bonds met the weakest demand in almost a year, and accelerated the rise in yields among what are known as superlong bonds, those with maturities of 20 years or more.
The auction follows a debacle on May 20, when Japan's Ministry of Finance offering of $6.9 billion in bonds saw the weakest demand since 2012. The bid-to-cover ratio was 2.50, down significantly from 2.96 in the previous auction.
The weak demand for Japanese debt sent alarm bells across bond markets, raising concerns about Japan's economy. On the eve of that auction, Prime Minister Shigeru Ishiba gave a gloomy outlook, saying Japan's fiscal situation is "undoubtedly extremely poor."
Analysts looked to Wednesday's offering as a possible "canary in the coal mine" moment for global bond markets.
"Now, Wednesday's 40-year auction could be a perilous hinge-point for global financial markets if bidding is weak for the 500 billion yen ($3.5 billion) of bonds on offer," analyst William Pesek of Yardeni Research said in a note Tuesday.
Reuters reported Tuesday that Japan's Ministry of Finance may reduce the issuance of superlong bonds as a way to combat rising yields on that debt and calm investor worries about the country's finances.
Superlong bond yields fell Tuesday on the news. Japan's benchmark 10-year yield fell three basis points to 1.46% and other major global bond market benchmarks also eased. The yen fell against the dollar and euro, according to FactSet.
U.S. Bond Market Impact
Japan's Ministry of Finance sold about 500 billion yen, equivalent to $3.46 billion, of 40-year bonds at a yield of 3.135%, according to The Wall Street Journal. The bid-to-cover ratio fell to 2.21 at Wednesday's sale from 2.92 in March. That marked the lowest level since July 2024.
Yields on 20-, 30- and 40-year bonds jumped briefly following the auction. The increase reflected a lack of domestic investor appetite for longer duration bonds, mirroring similar movements in U.S. Treasury yields, The Wall Street Journal reported.
The U.S. Treasury 10-year yield rose five basis points to 4.479% on Wednesday, on pace to snap a three-day slide.
The yen fell modestly vs. the dollar in New York morning trading, while the Nikkei 225 index closed nearly flat.
Japan is the largest foreign holder of U.S. Treasurys, another bond market that came under fire last week. A weak auction for 20-year bonds on May 21 heightened concerns about U.S. federal deficits and caused a stock market sell-off.
House passage of President Donald Trump's budget proposal raises new worries about a ballooning U.S. debt. Moody's downgraded U.S. bonds on May 16, citing little hope of bringing deficits down. The firm estimates the federal debt burden will rise to about 134% of GDP by 2035, from 98% in 2024. Japan's debt burden is the largest among developed nations, at a 260% debt-to-GDP ratio.
Japan has been trying to raise interest rates, which have been at zero or near zero since 1999. Trump's tariffs threw a wrench into those plans, Pesek wrote, forcing Bank of Japan Gov. Kazuo Ueda to cut back on monetary tightening.
Japanese policymakers have other worries. Japan's core consumer price index accelerated by the fastest annual pace in more than two years in April, to 3.5%.
The data came while markets were still reeling from the spike in Japanese government bond yields, "adding to the Bank of Japan's challenge of balancing price pressures against growth headwinds from U.S. tariffs," UBS analysts wrote in a report Friday.
The firm expects the Bank of Japan won't raise interest rates until the second half of next year, due to uncertainty while trade talks continue with the U.S.
