Japan’s Longer Bonds Gain After Auction Brings Short-Term Relief

Mount Fuji and the Shinjuku skyline seen from an observation deck in Tokyo, Japan, on Tuesday, Dec. 26, 2023. Japan's industrial output in November is scheduled to be released by the Ministry of Economy, Trade and Industry on Dec. 28. Photographer: Akio Kon/Bloomberg Photo by Akio Kon /Bloomberg

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(Bloomberg) — Japan’s longer-maturity government bonds gained after a 20-year auction reflected firm investor interest.

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The 20-year yield dropped as much as 10 basis points to 3.68% after the bid-to-cover ratio at Wednesday’s sale came in at 4.01, better than the average over the past 12 months. The average accepted yield was 3.711%, the highest since 1996. 

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The offering comes less than 24 hours after the country’s 20-year yield hit 3.78%, its peak since 1996. Japanese sovereign bonds have come under some of the most intense pressure amid a worldwide debt selloff as rising energy prices from the Middle East conflict stoke inflation fears. 

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“The 20-year bond auction produced strong results,” said Ataru Okumura, a senior interest-rate strategist at SMBC Nikko Securities. “There was likely a view that bond prices had become too cheap after the sharp rise in yields.”

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Thirty-year Japanese government bond yields dropped 11 basis points to 4.045%, and 40-year rates were lower also. Yields on both maturities edged away from the highest levels since they first started trading.

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Prime Minister Sanae Takaichi has called on the finance ministry to compile a supplementary budget in response to rising commodity prices, fueling concerns about heavier debt issuance.

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Minister of Finance Satsuki Katayama indicated on Monday that she will take into account the bond market as the government considers how to fund the extra budget. To finance part of its new spending, the government is likely to issue fresh debt, Reuters said, citing an unnamed government official.

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What Bloomberg strategists say:

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“The 20-year JGB auction posted solid metrics with a bid-to-cover ratio of 4.01 and a narrow tail. Moreover, the two biggest JGB houses stepped in to buy 60% of the sale between them, which is a reassuring signal to investors.

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Let’s see if this helps to calm global debt markets. If not, the calm in JGBs will be short-lived.

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—Mark Cranfield, Markets Live Strategist. Read more on MLIV.

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While sales of five-, 10- and 30-year bonds earlier this month went relatively smoothly, super-long yields subsequently climbed to even more elevated levels as it became evident that a deal in Iran might not be reached quickly. 

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“At the root of the global bear-steepening trend is the idea that the longer the Iran situation remains unresolved and prolonged, the more likely oil prices are to rise,” SMBC Nikko’s Okumura said. “So rather than signaling a trend reversal, this is probably just a short-term rebound following the sharp rise in yields.”

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The recent slide in the yen is heightening inflationary risks and weighing on Japanese bonds as pressure mounts on the Bank of Japan to raise rates. Traders are now factoring in about an 80% chance of a rate hike at the BOJ’s June meeting, according to the swaps market.

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—With assistance from Masahiro Hidaka.

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(Updates with quotes in fourth and ninth paragraphs, adds chart.)

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