The 10-year U.S. Treasury yield fell by 5 basis points, while the 30-year Treasury yield dropped by 8 basis points at one point on Tuesday. This came after Japan’s Ministry of Finance sent a questionnaire to market participants about the appropriate scale of bond issuance. The move caused long-term bond yields in Japan and elsewhere to plunge.
Japan’s 20-year government bond yield fell sharply by 19.5 basis points to 2.31%, and the 40-year bond yield dropped 25 basis points.
Japan Signals Possible Reduction in Bond Supply
Some traders interpret the questionnaire as a sign that Japanese authorities want to calm their bond market. By possibly cutting bond issuance, Japan aims to ease the pressure from weakening demand in the world’s third-largest bond market.
Michael Brown, a strategist at Pepperstone Group in London, explained, “The potential decline in issuance has brought great help to the U.S. Treasury market. For those seeking to buy long-term bonds, the decline in Japanese government bond supply may force them to buy U.S. Treasuries.”
Background: Weak Demand and Market Turmoil
Japan’s Treasury Department issued the questionnaire after demand for 20-year bond sales dropped to the lowest in over a decade last week. This weak demand triggered heavy bond selling, worsening global bond market instability.
Last week, developed market bond yields rose broadly. The 30-year U.S. Treasury yield climbed to its highest level since 2007, fueled by investor worries over the government’s ability to finance large budget deficits. At the same time, the Japanese bond market faced pressure amid speculation the Bank of Japan may reduce its large holdings of government bonds.
Market Response and Remaining Concerns
The possibility that Japan will reduce bond supply has helped ease some market concerns about demand. However, it does not address broader worries about Japan’s fiscal health. Experts caution that Tuesday’s bond rally may only be a temporary pause amid ongoing turmoil.
Shier Lee Lim, chief foreign exchange and macro strategist at Convera Singapore, commented, “The shift in issuance strategy is seen as a response to growing pressure from the bond vigilantes — investors who oppose unsustainable fiscal policies — highlighting how the market influences government debt management. While short-term sentiment has improved, increased reliance on short-term bond issuance may raise rollover risks over time.”
Broader Impact on Global Bond Markets
Yields on Japan’s 30-year and 40-year bonds fell further on Tuesday, losing some of last week’s gains. The news also pushed down long-term government bond yields in countries such as Australia and New Zealand.
