Japanese bonds dodge market risks after successful auction

Japan’s sale of its 30-year government bonds on Thursday had a bid-to-cover ratio of 3.58 versus 2.92 at a prior sale in June. The highest yield accepted at auction, the auction’s tail, was at 0.31 yen versus 0.49 yen at the previous sale.

Market Live Strategist Mark Cranfield acknowledged that today’s 30-year JGB auction passed with solid metrics, with a notable improvement in the bid-to-cover ratio to 3.58, although the lowest actual price was below forecasts. Ansh Gandhi, a fixed-income strategist at Futures First Info Services, said the sale of 10- and 20-year bonds bodes well for the 20-year offering.

Japanese yields drop from recent peaks

Japan’s bond yields were pulled higher due to renewed concerns about fiscal spending globally. The country’s recent 30-year government bond auction drew a level of demand that suggests lawmakers are making progress in getting rid of debt-market volatility.

Although the offer-to-bid was at 3.58, the minimum bid price was lower than expected in a sign that some in the market are still cautious. Japanese bond yields surged, including the 30- and 40-year bond yields both adding 8 bps to 2.965% and 3.14% respectively.

Kazuya Fujiwara, a bond strategist at Mitsubishi UFJ Morgan Stanley Securities Co., argued that the sharp rise in long-term interest rates in the UK due to concerns over fiscal expansion is likely contributing to anxiety over Japan’s fiscal outlook. He noted that an increase in government borrowing costs globally is driving yields higher, especially with the surge in yields on Wednesday in the U.S., Germany, and the UK. 

Fujiwara believes that Japan’s yield auction results suggest that the country may be able to prevent a repeat of the market turmoil caused by sales of longer-maturity bonds in May. During that time, the Ministry of Finance unveiled plans to reduce bond sale amounts for longer maturities to sell fewer super-long bonds.

The MOF promised to cut issuance of 20-, 30-, and 40-year debt from July by a combined 3.2 trillion yen ($22 billion) in the next 9 months. The Bank of Japan also revealed that it would withdraw from credit acquisitions.

Shuichi Ohsaki, a senior portfolio manager at Meiji Yasuda Asset Management Co. in Tokyo, noted that there was a certain level of demand at the auction. However, it still showed a fair amount of caution. He said that the auction felt somewhat weak, but still believes it’s unlikely to cause turmoil in the bond market.

Ohsaki noted that this week’s high demand at the country’s 10-year bond sale soothed the market, although a drop in UK gilts on Wednesday reignited concerns about fiscal spending globally.

Japan gears up for a national election this month

Shoki Omori, chief strategist at Mizuho Securities, argued that investors still need to see the upcoming 20-year auction to fully understand investor appetite for the long-end. He acknowledged that the auction gave some relief for long-end investors, referring to a sale of 20-year debt on July 10.

The Liberal Democratic Party’s Policy Chief and former Defense Minister Itsunori Onodera said in an interview with Bloomberg last week that Japan’s fiscal outlook was already facing a “yellow alert.” He also expects expenditures to surge as Japanese Prime Minister Shigeru Ishiba sets salary increases and a one quadrillion yen economy as the top campaign promises for the upcoming upper house elections.

Ken Matsumoto, a macro strategist at Credit Agricole in Tokyo, mentioned that uncertainty around the upper house election would likely hold back demand at the auction. He believes that the fiscal policy stance of the government could change drastically depending on the election results.

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