TOKYO – Japan’s 20-year government bond auction on Oct 20 saw the strongest demand on record, as elevated yields attracted renewed buying from domestic investors.
The bid-to-cover ratio was 5.84, compared with 4.01 at the previous sale, and a 12-month average of 3.73.
In another sign of robust investor interest, the tail, or gap between average and lowest-accepted prices, was 0.07, compared with 0.15 in September. The yield for the tenor fell as much as 6 basis points to 3.710% after the results.
Ryutaro Kimura, senior bond strategist at BNP Paribas Asset Management, said the “positive outcome” was “a reflection of recovering demand from domestic investors, driven by high interest-rate levels and easing fiscal concerns”.
Life insurers have strengthened their net buying of super-long bonds again since June, underscoring the recovery in demand, he said.
Japan’s super-long yields have recently approached multi-decade highs, as a global bond selloff driven by escalating tensions in the Middle East and higher oil prices added to inflation and fiscal concerns.
Earlier in October, the 20-year JGB yield climbed to levels last seen in the mid-1990s, while the 30-year yield hit a record high.
The rise in yields reflects persistent concerns over Japan’s fiscal outlook, as investors are focused on how Prime Minister Sanae Takaichi will fund her planned sales-tax cut on food and soft drinks without further straining the nation’s finances.
Takaichi has sought to ease market concerns, saying her administration aims to build a strong economy and achieve fiscal sustainability, while pledging to appropriately manage JGB issuance in next fiscal year’s budget.
Against that backdrop, investors have been watching to see if elevated yields will draw demand from domestic institutional buyers.
Fukoku Mutual Life Insurance, the first life insurer to outline its plans for the fiscal second half, said it sees scope to move a bit more from foreign bonds into yen bonds as yields have risen more than expected.
What Bloomberg strategists say…
Mark Cranfield, Bloomberg’s markets live strategist, said: “That’s stunning demand for a 20-year JGB auction; indeed, it is the best on record for the duration and sets up a faster pace of yield curve flattening.
“It is exceedingly rare to see any JGB auction with a bid-to-cover above 5.0, and it’s even more remarkable in 20-year, which has seen a decidedly mixed record over the past two years.”
He added: “There is a very large unknown component in the buying, which suggests that foreigners have stepped up to participate. Showing confidence that the BOJ will deliver on a steady path of interest rate hikes.”
A major test for Japanese bonds will come at the Bank of Japan’s policy meeting next week.
While markets widely expect the central bank to keep rates unchanged, with overnight index swaps pricing in about a 6.2% chance of a hike, traders will look to Governor Kazuo Ueda’s post-decision press conference for signals on the pace and scope for further tightening. BLOOMBERG
