The Japanese government bond (JGB) market maintained its stability even as demand for a 20-year bond auction declined, signaling robust investor confidence. Results from Thursday's auction revealed that the bid-to-cover ratio for 30-year JGBs fell to 3.08, lower than the previous issuance and the average over the past 12 months. Despite this, the yield on 30-year JGBs continued to decline. Meanwhile, the benchmark 10-year JGB yield increased by 1 basis point, and bond futures prices edged lower.

Miki Den, a senior rates strategist at SMBC Nikko Securities, commented, "The 20-year JGB auction results were solid. Strong short-covering demand supported the auction, alongside market expectations that pension funds would sell stocks and buy bonds for portfolio rebalancing amid rising equity prices." The yield on 20-year JGBs is currently hovering around 2.97%, significantly down from last month's peak of 3.46%, which was the highest level since 1997. This decline followed Prime Minister Sanae Takaichi's decisive electoral victory, which may afford her more time to formulate clearer policies and more restrained fiscal spending.

The bid-to-cover ratio for this auction was lower than the 3.19 recorded in the previous auction and the 12-month average of 3.29, marking the lowest level since May. In January, Japanese bond yields surged to multi-year highs, leading to a bond market downturn. The sell-off, which intensified on the day of the last 20-year bond sale, was triggered by Takaichi's campaign pledge to reduce the food consumption tax for two years. Investors are still awaiting further details from the Prime Minister on how she plans to balance tax cuts with increased spending on defense and strategic industries. Takaichi stated at a press conference on Wednesday that the proposed tax reduction would not rely on deficit-covering bond issuance.

Thursday's bond auction took place against a backdrop of global bond market pressure. U.S. Treasury prices fell as cautious remarks from Federal Reserve policymakers and strong U.S. economic data tempered expectations for more aggressive interest rate cuts this year. This also contributed to a weaker yen against the U.S. dollar. Analysts noted that following the completion of the 20-year JGB issuance, traders could refocus on the theme of a flattening yield curve, as the auction's metrics fell within recent expectations.

Japanese government bond futures softened slightly, though this was largely a delayed reaction to weakness in U.S. Treasuries. The even distribution of buyers among major institutions provided reassurance to investors. Overall, the situation contrasted sharply with the turmoil that followed January's 20-year JGB auction. Unrealized losses on JGB holdings increased for Japan's four major life insurers, highlighting the risks of investing in a volatile bond market. Data from the Japan Securities Dealers Association showed that overseas investors were the largest buyers of medium- and super-long-term JGBs last year.

Analysts suggested that a proposed accounting rule change, which could alter how insurers report their fixed-income holdings, may have supported JGB prices this week. A smoothly conducted 5-year JGB auction on Tuesday also improved market sentiment, after expectations for an early interest rate hike by the Bank of Japan had diminished. Homin Lee, senior macro strategist at Lombard Odier, remarked, "The proposed accounting change should ultimately provide additional support, but we suspect trust banks will bear most of the adjustment until the rules are clarified and other policy catalysts are resolved. The market remains volatile."