JGB Traders Breathe Sigh of Relief After Strong 30-Year Auction

(Bloomberg) -- Traders in Japan's government bond market are relieved after strong appetite at a record 30-year auction signaled that investors are willing to buy the nation's super-long debt.

Tuesday's sale drew a bid-to-cover ratio of 3.92 times, the highest since July last year. Markets had been concerned about investor demand ahead of the sale, the first for the 30-year tenor since the government's latest increase in debt issuance took effect this month. Japan's bond futures edged higher after the result.

The solid auction has spurred some bets that a steepening of Japan's curve since March due to a jump in super-long yields may pause for now. Markets have two more JGB sales to contend with in this segment later this month: an offering of 20-year bonds and another of 40-year securities.

“There are still those who expect the curve to steepen, but there is also a possibility of a bear-flattening as the 10-year sector is firm,” said Shuichi Ohsaki, chief rates strategist at Bank of America Merrill Lynch in Tokyo. “There appears to be dip-buying from life insurers.”

Yields on Japan's super-long bonds had climbed to their highest levels in more than a year ahead of Tuesday's sale, amid a relative lack of buying support from the Bank of Japan. Given its commitment to pinning benchmark 10-year yields around zero percent, the BOJ has been mopping up excess supply only in shorter maturities.

Further, Japan's super-long yields aren't high compared with that of other nations, BOJ Governor Haruhiko Kuroda said on June 16.

More Supply

It is for these reasons that the likes of Nissay Asset Management Corp. say that any market comfort provided by Tuesday's auction may be temporary.

Yields in the super-long end still have more scope to rise than to fall, said Eiichiro Miura, general manager of the fixed-income department at Nissay in Tokyo. Supply increases began from July, and the BOJ hasn't responded with expanded buying in this sector, he said.

“Life insurers may continue to buy super-long bonds regularly, but there are few reasons for them to front-load purchases or quicken the pace of buying,” he said.

Traders now await an auction of 20-year bonds worth 1.2 trillion yen on July 21, which is 300 billion more than the last offering in the tenor. That will be followed by a 500-billion yen offering of 40-year notes a week later.

The 30-year auction saw a solid result thanks to short-covering and also unwinding of steepening positions built before the sale, said Ohsaki of BofA.

That said, there will always be concern about whether demand will be sufficient to absorb the supply, putting upward pressure on yields in general, Ohsaki said. That may weigh on the 20-year sale, he added.

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