Investors are on tenterhooks Wednesday for an auction of 40-year Japanese government bonds as volatility in the nation’s yields continues to rumble through global debt markets.
The sale is seen as a key test for longer-maturity bonds amid concern from Tokyo to New York that rising government spending will take budget deficits into dangerous territory. The challenges in Japan’s bond market are amplified by the central bank rolling back its purchases and reluctance of institutional investors to fill the gap.
Super-long JGBs rallied Tuesday, sending yields on the 40-year maturity down 25 basis points on signs that the finance ministry may be prepared to adjust debt issuance to ease the turmoil. The moves in Japan — which followed aggressive upward pressure on global borrowing costs last week — pulled yields lower on long-tenor debt from the US to Germany, and spilled over into currency trading.
“Investors may find it difficult to buy, and the auction results are likely to come in on the weak side,” Miki Den, a senior rates strategist at SMBC Nikko Securities in Tokyo, wrote in a report late Tuesday, citing the recent retreat in yields. “Until the key events concentrated in June are behind us, the 40-year JGB yield is likely to remain under upward pressure.”
Next month is shaping up as pivotal for the bond market, with the central bank holding a policy meeting June 16-17 at which it is expected to consider any changes to its tapering of debt purchases. Meanwhile, the finance ministry is expected to be considering input from market participants on bond issuance.
The yield on 40-year bonds was up eight basis points at 3.365% at 10:27 a.m. in Tokyo Wednesday. Results of the finance ministry’s sale of ¥500 billion of the bonds maturing in March 2065 are expected around 12:35 p.m. local time.
Kazuhiko Sano, chief strategist at Tokai Tokyo Securities, pointed to both upside and downside risks for the sale, with key support coming from the government using a “Dutch auction” method in which the price is lowered until the buyers accept.
“The 40-year auction is expected to yield a stronger-than-anticipated result, supported by absolute yield levels, relative cheapness, potential issuance cuts,” he said in a report dated May 28. “However, with yields having already declined sharply in advance, there is an increased risk of insufficient bids, and a cautious stance is warranted.”
The finance ministry — in a move that was unusual because of its timing and the wide group of people contacted — sent a questionnaire to market participants on Monday evening that asked for their views on issuance and the current market situation, said people familiar with the situation.
What Bloomberg Strategists Say…
Wednesday’s auction of 40-year JGBs no longer looms over global markets as such a severe risk now that the authorities seem to have made it clear they want no truck with a rout in super-long bonds. The implicit backstop provided by both the government and the central bank means today’s sale has a decent chance of achieving a bid-to-cover ratio of 3 or more for the first time since 2020.
— Garfield Reynolds, MLIV Team Leader. Read more on MLIV
“As the bond yield curve steepens globally, policymakers cannot afford to sit idle,” said Hiroshi Matsumoto, a senior client portfolio manager at Pictet Asset Management Japan Ltd. “They needed to send the message that they care about the long end of the market and they are paying attention.”
The move underlines how Japan is seeking to regain stability in the market after a sale of 20-year notes last week got the weakest demand in more than a decade.
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