Japanese government bond yields fall from multi-decade highs; Nikkei drops

Japanese government bond yields fell from multi-decade highs and record levels on Wednesday, after strong auction results eased concerns about the impact of inflation on demand for debt.

The benchmark 10-year JGB yield fell 1.5 basis points to 2.785%, after rising for seven straight days to a 29-year high on Tuesday.

The 40-year JGB yield, Japan's longest-dated debt, fell 7.5 basis points to 4.32% from an all-time high.

Yields move inversely to prices.

Persistent inflation fears linked to soaring oil prices and the Iran war have been the main driver of heavy selling in global bond markets. US Treasuries and German Bunds continued their declines overnight.

Japan's fiscal outlook added further pressure, with the government expected to increase JGB issuance to fund a supplementary budget. The 20-year JGB yield fell 4.5 basis points to 3.735%.

A Ministry of Finance auction of 700 billion yen ($4.40 billion) of bonds saw a bid-to-cover ratio, a measure of demand, of 4.01 times, higher than the past year's average, though below the 7-year high of 4.82 seen in the previous auction.

"The auction results were positive, but it's questionable whether the market situation will improve as a result," said Katsutoshi Inadome, chief strategist at Sumitomo Mitsui Asset Management. "The market is assessing the effects of inflation, as well as the possibility of increased government spending. Japanese government bond yields are contributing to increased pressure on Japanese government bond yields."

Hawkish remarks from the Bank of Japan have fueled speculation of an interest rate hike at its June meeting. Governor Kazuo Ueda acknowledged the rapid rise in long-term yields on Tuesday and pledged to monitor the JGB market closely.

Bonds for individuals

Meanwhile, Japan plans to launch a new set of government bonds targeting individual investors, in a move aimed at filling the gap left by the central bank's declining purchases, three government sources said on Wednesday.

The new set will include inflation-linked bonds and ultra-long JGBs, whose purchases will be limited to households, according to the sources, who asked not to be identified.

This move comes as JGB yields reach their highest levels in decades, driven by investor concerns about inflation risks and the government's plan to prepare an extraordinary budget funded by additional debt.

The Ministry of Finance, responsible for debt issuance, will discuss the idea at a meeting with experts and academics scheduled for May 26, the sources added.

With the Bank of Japan holding 49% of outstanding JGBs, it is gradually slowing its purchases as part of its efforts to reduce economic spending on the decade-long massive stimulus package.

The Ministry of Finance is targeting households to broaden the investor base for JGBs, as the shrinking role of the central bank and declining demand from private financial institutions make yields more susceptible to sharp fluctuations.

For individual buyers, the Ministry of Finance currently issues 10-year floating-rate JGBs, as well as 3- and 5-year fixed-rate bonds.

These products, long unpopular due to low interest rates, have seen increased demand as the Bank of Japan raises interest rates, leading to higher yields.

According to Ministry of Finance data, out of the total JGBs scheduled to be issued in the current fiscal year, which began in April, amounting to 180.7 trillion yen ($1.14 trillion), retail buyers account for only 4%.

Nikkei retreats

Meanwhile, Japan's Nikkei stock index closed at its lowest level in nearly three weeks on Wednesday, with SoftBank Group leading the decline as investors took profits on AI stocks that had supported the market's recent rally.

The Nikkei fell 1.23% to 59,804.41, its lowest closing level since May 1.

The broader Topix index fell 1.53% to 3791.65.

Market participants sold shares that had driven the Nikkei to record highs earlier this month, according to Kazuaki Shimmada, chief strategist at Iwai Cosmo Securities.

"But this is a suitable adjustment for the Nikkei's reliance on a small number of stocks," he added.

The Nikkei had reached an all-time high of 63,799.32 on May 14.

Among the biggest losers, technology investor SoftBank Group fell 6% on Wednesday, and chip-making equipment manufacturer Tokyo Electron lost 2.25%.

Commerzbank and Unicredit

Commerzbank staff and its executive management, along with a number of investors, expressed their rejection of Unicredit's takeover bid on Wednesday, at the opening of the shareholders' meeting, confirming the continued widespread opposition to the cross-border deal.

This decisive stance comes at a pivotal moment in a months-long takeover battle, after Italian bank Unicredit launched its offer last month, which Commerzbank officially rejected this week.

Andreas Thomae of Deka Investment described Unicredit's offer as "unattractive," warning that the merger plans could tie up the German bank for years, with risks of weakening its focus on customer service.

"The voluntary exchange offer is not an option at the moment," he said during the annual shareholders' meeting.

This is the second shareholders' meeting for Commerzbank since Unicredit, led by CEO Andrea Orcel, began building its stake in the bank, which reached about 30% since 2024.

Commerzbank officially rejected the offer on Monday, describing it as undervalued and high-risk, a position echoed by CEO Bettina Orlopp in her speech to shareholders.

"Potential revenue losses are underestimated, cost-cutting estimates are overly optimistic, while restructuring costs will be much higher than expected," Orlopp said.

The vicinity of the general meeting saw notable protests, with dozens of employees gathering, blowing whistles, and many wearing the bank's yellow uniform, holding banners that read: "Go away, Unicredit!" and "#NoToMerger #NoToOrcel."

For his part, Orcel asserts that Commerzbank has not reached its full potential and that Europe needs larger, more competitive banks in an unstable geopolitical environment.

"We are deeply concerned that his plan, if implemented, will not be strategically sound, will lead to job losses, and will threaten German small and medium-sized enterprises," Friedrich Vernening, a union official and Commerzbank board member, told Reuters.