Bond Traders in Japan Can’t Stop Fretting Over Long-End Supply

(Bloomberg) -- Moves in Japanese government bonds are signaling concern among traders about the market's ability to absorb an increase in supply of longer-dated notes from July.

Yields on the so-called super-long maturities have risen faster even after the government concentrated the bulk of the rise in its record fiscal 2020 debt sales in shorter maturities. That's sent Japan's curve to its steepest since November, with the spread between the 30-year yield and the 10-year yield climbing back above 50 basis points. It was at 25 basis points around mid-March.

At the heart of the issue is the relative lack of bond-buying support from the Bank of Japan in the super-long sector. While the central bank has ramped up its purchases of short- and medium-tenor securities to help mitigate the impact of the supply deluge, its purchases of bonds maturing over 10 years are largely unchanged so far in 2020.

And given the BOJ's commitment to prevent an excessive flattening of the nation's yield curve, market watchers aren't expecting the scenario to change.

“The yield curve is going to be on a steepening bias as the market faces more issuance,” said Akio Kato, general manager of strategic research and investment at Mitsubishi UFJ Kokusai Asset Management Co. The spread between the 10- and 30-year bonds could extend toward 60 basis points as such wariness prevails, he said.

READ: Japan's Bond Issuance to Surge to 212 Trillion Yen on Stimulus

BOJ officials including Governor Haruhiko Kuroda have repeatedly expressed concerns about how lower super-long bond yields tend to hurt profitability at life insurers, banks and pension funds, and negatively impact consumer sentiment.

“The BOJ has made it clear and the market understands that the central bank wants to steepen the yield curve,” Kato said. “Any signal of increasing purchases in super-long maturities could be taken as a major policy shift and hence the BOJ would want be very careful about that.”