Prices of 10-year government bonds plunged Thursday, driving the yield on the key issue to a nine-month closing high following weak demand at an auction for new 10-year bonds earlier in the day.

In interdealer trading, the yield on the No. 250 10-year, 0.5 percent government bond issue surged 0.225 percentage point from Wednesday to 1.125 percent, its highest closing level since last Oct. 10.

The surge in yields is bad news for the nation’s borrowing costs.

Hopes for improvement in the economy, prompted by upbeat economic data in the United States and Japan, have recently dampened bond market sentiment. A better view of the economy means less demand for government bonds, viewed as “safe haven” investments.

The yield on the newly issued No. 251 10-year, 0.9 percent JGB issue was quoted at 1.110 percent.

The price of the September futures contract for 10-year bonds plunged 1.63 points to 139.65 on the Tokyo Stock Exchange, sending the yield up 0.132 percentage point to 1.457 percent.

Despite the continued fall in government prices, the Finance Ministry’s top bureaucrat said the ministry does not believe the drop signals a change in market climate.

“Many of those in the market see the market environment for government bonds as being good. We also think that there has been no change,” Vice Finance Minister Masakazu Hayashi told a news conference.

The auction for the new 10-year government bonds earlier in the day showed a sharp drop in demand, although the issue was not undersubscribed as feared by some market players.

The Finance Ministry auctioned 1.49 trillion yen worth of the 0.9 percent, 10-year bonds. Bids totaled 2.51 trillion yen, bringing the bid-to-cover ratio, or the ratio gauging the amount of bids to the amount auctioned, to 1.68.

That was down from 3.15 in the previous auction for 10-year bonds last month.

Demand dropped even though the ministry set the coupon on the issue at 0.9 percent per year, up 0.4 percentage point from the June issue’s record low 0.5 percent.

The coupon, which is set in reference to the yields on outstanding government bonds, was raised for the first time in 17 months.

The coupon for 10-year government bonds had been cut almost every month since the beginning of the year as investors facing a dearth of attractive investment options flocked to the government bond market, sharply dragging down yields.

Asked whether the Finance Ministry plans to take any steps to ensure smooth issuance and absorption of government debt, Hayashi said, “In any case, we will proceed with the goal of smoothly securing funds and limiting the country’s burden to as little as possible from a mid- to long-term perspective.”

The government will, for example, hold discussions on whether to introduce a primary dealership system as called for by market participants, Hayashi said.

The primary dealership system creates a pool of financial institutions that participate in auctions and are required to purchase certain minimum amounts of bonds.

“Various steps will be required,” Hayashi said. “We have held dialogue with market participants from such a viewpoint, and I believe such efforts should continue as a matter of course.”

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