Bond auctions reveal softer demand for government debt

by Alice Gledhill and Ruth Carson

A spate of poorly-received longer-dated sovereign bond auctions worldwide has raised questions about the willingness of investors to fund the spending plans of governments from the US to Japan.

Japan’s 30-year bond sale Thursday was the third in as many weeks to show signs of a cold shoulder from buyers, with one measure of demand the weakest since 2023. A post-auction rally suggested investor expectations of demand had been even lower.

Meanwhile, Tuesday’s auction of 12-year Australian government debt saw the weakest demand in about six years and Wednesday’s post-election South Korean 30-year sale saw the lowest investor appetite since 2022.

The results will amp up scrutiny of issuance in the world’s biggest bond market, with the US set to sell both 10- and 30-year debt next week. Investors there are already demanding more compensation to hold long-dated Treasuries due to growing anxiety about America’s widening fiscal deficit.

“Japan bonds are showing the same story of what’s happening everywhere else,” said Martin Whetton, head of financial markets strategy at Westpac Banking Corp. in Sydney. “Long-end bonds are generally not the flavor anymore.”

With the US’s ‘Big Beautiful Bill’ expected to add trillions of dollars to the federal deficit over a decade, European defense spending on an upward trajectory thanks to the war in Ukraine and Japan pledging to relieve the impact of higher overseas tariffs, governments worldwide have ambitious plans that need funding. But that’s likely to come at a cost, especially if they want to borrow over an extended period — a Bloomberg global gauge of longer-dated sovereign yields has climbed to around the highest since 2008.

Investors largely took Thursday’s auction result in their stride, with Japan’s longer-dated bonds extending gains and Treasuries little changed, after Wednesday’s rally on softer-than-expected US jobs data. That kept alive hopes for Federal Reserve interest-rate cuts which could help shore up the bond market.

But demand wobbles have already caused some governments to rethink their borrowing strategies. Japan’s finance ministry reportedly sent a questionnaire to market participants last month, asking for their views on issuance and the UK reduced planned sales of long-dated gilts to a record low in April.

“We see potential for further bouts of uncertainty over long-end demand dynamics globally,” JPMorgan Chase & Co. strategists including Francis Diamond wrote in a recent note.

The broader trend of higher global yields are a warning sign from investors that governments can’t keep borrowing at the pace they did when interest rates were close to zero. Some even worry about a repeat of the UK’s 2022 bond market revolt when former premier Liz Truss announced enormous package of unfunded tax cuts.

“If long-term interest rates are going up because there is a genuine concern about fiscal sustainability, especially in the US, either bond vigilantes come back, or you have a Liz Truss moment resulting in a lot of panic,” said Luca Paolini, chief strategist at Pictet Asset Management.

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