Japanese 20-year bond yields fell after an auction of that tenor drew the strongest demand since 2020, offering a reprieve to investors navigating heightened political and fiscal risks.
Bond futures also rose after the auction results showed the bid-to-cover ratio increased to 4. That’s higher than 3.09 at the previous sale in August and a 12-month average of 3.2. Yields on 20-year sovereign notes fell 3.5 basis points to 2.635%, edging away from a multi-year high seen earlier this month.
Wednesday’s sale brought some breathing room for investors concerned that the country’s new prime minister may favour more expansionary fiscal policies, which would potentially weigh on long-end bonds. Elevated yield levels appear to have drawn buyers in the first test of appetite for new super-long debt since Shigeru Ishiba announced his resignation.
“The strong auction result provides a welcome respite for the Japanese government bond market,” said Homin Lee, a senior macro strategist at Lombard Odier Singapore Ltd. “It is possible that attractive prices were a factor for insurers and trust banks who have shown slightly better appetite for JGBs recently.”
The sale result puts the market on a stronger footing going into the Federal Reserve’s policy decision Wednesday, and that of the Bank of Japan on Friday.
The leadership race for the ruling Liberal Democratic Party has made it more difficult for investors to get a clear picture of when the BOJ may next hike rates, though expectations of such a move have grown after Bloomberg News reported the central bank may tighten policy again in 2025 regardless of political volatility. Overnight index swaps now reflect a roughly 60% chance of another move by year-end.
What Bloomberg Strategists Say…
“JGB futures are higher after the 20-year sale produced a bid-to-cover ratio of 4.0, which is best since 2020, with the tightest tail since January’s auction. Now it’s onto the Fed and BOJ meetings with the latter still a risk factor if Governor Ueda puts an October rate hike on the table. Investors are pricing for December as the more likely option for any BOJ action, so signaling an earlier move could be taken badly by JGBs.”
— Mark Cranfield, MLIV macro strategist
The tail, or the gap between the average and lowest accepted price, narrowed to 0.10 from 0.13 last month, in a further sign of firm demand.
Still, the market is likely to remain jittery as the LDP’s leadership vote early month nears. Shinjiro Koizumi, who formally entered the race this week, is seen as more supportive of interest-rate hikes than likely rival Sanae Takaichi, who favors a dovish monetary stance and looser fiscal policy.
The auction result may also ease pressure on the Ministry of Finance, which has already reduced super-long issuance in response to market volatility and is now seeking feedback on whether further cuts are needed.
“These results are likely to be welcomed by the MOF, which has been closely monitoring the performance of super-long-dated JGBs,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. “The outcome not only reinforces confidence in the government’s funding operations, but also highlights the resilience of investor demand across the longer end of the Japanese yield curve.”
Traders are looking ahead to next week’s 40-year bond sale to see whether buying of super-long sector bonds will be sustained.
The 20-year auction has eased concern about ultra-long bond issuance, but given the 40-year sale will come in the run-up to the LDP vote, caution is still warranted, said Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management Co. in Tokyo.
