Japan's auction of 20-year government bonds drew record demand, a sign that higher yields are drawing domestic investors back into the market. SoftBank Group, which has been sharply expanding its artificial intelligence investments, saw its credit risk climb to a four-year high as concerns over AI spending mounted.
The bid-to-cover ratio at the 20-year auction held on the 20th came in at 5.84, according to Bloomberg. That far exceeded the 4.01 ratio at the previous sale and the 12-month average of 3.73. Immediately after the results, the 20-year yield fell as much as 6 basis points to 3.710%, while the 30-year yield dropped as much as 5 basis points. One basis point equals 0.01 percentage point.
Japan's super-long bond yields have recently approached their highest levels in decades. A global bond selloff triggered by rising Middle East tensions and higher oil prices has amplified concerns about inflation and public finances. Earlier this month, the 20-year yield rose to a level last seen in the mid-1990s, and the 30-year yield hit an all-time high.
Masahiko Loo, senior fixed-income strategist at State Street Investment Management, said Japanese government bonds have become investable again. Perceptions are gradually shifting from "don't catch a falling knife" to "you get paid to wait," he said, adding that the change is becoming increasingly evident across global bond markets.
Behind the rise in yields are concerns about Japan's fiscal outlook. Investors are focused on how Prime Minister Sanae Takaichi will fund a planned cut to the consumption tax on food and soft drinks without adding to the fiscal burden. Takaichi has pledged to achieve both a strong economy and fiscal sustainability, and to appropriately manage government bond issuance in next fiscal year's budget.
Domestic institutions are also shifting their stance. Fukoku Mutual Life Insurance said yields had risen more than expected, leaving room to move more funds from foreign-currency bonds into yen-denominated debt. More than 83% of the bids at this auction came from buyers who were not identified. Strategist Kimura added that the share points to demand from large investors such as the megabanks and the Government Pension Investment Fund.
Mark Cranfield, a strategist at Bloomberg Markets Live, called the result remarkable demand for a 20-year auction and said the record for that maturity created conditions to accelerate the flattening of the yield curve. He said the unusually large share of unidentified buyers suggested foreign investors had increased their participation.
Top Credit Risk Among Japanese Companies: SoftBank's AI Borrowing Weighs
On the same day, the price of credit default swaps on SoftBank Group rose to its highest level in about four years, reflecting growing concerns over AI-related fundraising and the possibility of a large acquisition. Japanese government bond yields serve as the benchmark for yen market rates. The rise in yields did not itself create SoftBank's credit risk, but analysts say it acted as a catalyst that exposed vulnerabilities in the company's debt-fueled, aggressive AI investments and its high-cost funding structure.
Data compiled by Bloomberg showed SoftBank's five-year CDS at 432 basis points on the day, a level not seen since early November 2022. The spread has widened by more than 30 basis points after passing 400 basis points a week earlier. SoftBank's CDS is the highest among major Japanese companies, more than 130 basis points above the spread on Nissan Motor, which ranks second.
Concerns about debt-financed AI investment have intensified as the financial strain at U.S. cloud computing company CoreWeave came to light. SoftBank has also come under scrutiny as it weighs an acquisition of Allied Universal while its funding costs climb.
Sharon Chen, a credit analyst at Bloomberg Intelligence, projected that at least $6 billion (about 7.96 trillion won) in cash will flow out of SoftBank in the fiscal year ending March 2027. Additional AI investment would increase its funding needs, she said. In a report, Chen said SoftBank "will need to raise new funds for this deal" and that its loan-to-value ratio could approach the 25% ceiling it has set for itself. SoftBank Group's shares have recently fallen about 50% from their June peak.